This mixed situation is putting the global economy to the test. Economists have been expecting a global recession for months. After all, recessions are an integral part of a functioning economic cycle. They direct resources such as money and labor back to where they are most useful. In recent years, the central banks have repeatedly successfully resisted recessionary tendencies. Emerging problems were filled with cheap money, and national economies made themselves comfortable in a credit-financed prosperity bubble. financial crisis, euro crisis or pandemic, the cheap central bank money seemed to solve all problems quickly. Now the receipt is coming, inflation is getting out of hand and the central banks have to take massive countermeasures. Liquidity has to be withdrawn from the market again, the party seems to be over for now.
Recession is not the same as recession
The boom and the recession are the main phases of an economic cycle. The boom and the trough are the turning points. Economic output shrinks during a recession. To measure this, economists use gross domestic product (GDP). GDP measures the value of all services and goods within an economy. The calculation is carried out quarterly or for the entire year. When an economy finds itself in a recession can only be determined in retrospect. When an economy’s GDP shrinks for two consecutive quarters, economists speak of a technical recession. However, not all recessions are the same. For many economists, the labor market also plays a crucial role. An official recession has never been announced in the USA without a simultaneous rise in unemployment. If a recession lasts for a very long time and has serious consequences, economists speak of a depression. But the economy usually recovers after just a few months. In a depression, the downturn in the economy lasts for several years.
Initially falling share prices
The consequences of a recession are difficult to predict. The longer a recession lasts, the more severe the impact. The stock market is particularly affected. Especially at the beginning of a recession, the stock markets often correct. Stock prices are falling across the board. However, this phase also harbors opportunities for active investors. Because the low stock market prices offer good opportunities for getting started or expanding an existing investment. Because many stocks are attractively valued during a recession. There are companies that are defying the crisis and the recession. In a recession, companies with pricing power in particular are able to push through price increases that exceed the effect of inflation.
Interesting entry levels
What all recessions have in common is that the stock markets are already rising again before the economy has bottomed out. Value stocks in particular benefit in a recessionary environment. Such titles are characterized by a stable business model, a strong market position and high pricing power. Such companies are often found in the consumer staples and utilities sectors. But there are also good entry points for growth stocks. Because growth stocks come under pressure from rising interest rates and a revaluation of prices at the beginning. Interesting entry levels are again available here for long-term investors. Research shows that, on average, markets bottom about 200 days, or about seven months, before the recession ends. A recession has often been an excellent time to enter in the past. Unfortunately, you only ever know in retrospect whether and for how long you have already been in a recession.
Recession offers an opportunity for entry
Investors should therefore not make the mistake of prematurely turning their backs on the stock market in the current crisis environment. In principle, an investment in shares should always be of a long-term nature. A well-diversified and balanced portfolio will weather a recession well. Investors should actively use this market phase and invest because of the recession, not in spite of it. Anyone who has not been able to bring himself to enter the stock market in recent years now has the time to enter. A recession also has a positive effect on inflation. Because recession eats up inflation. Due to the weaker economic growth, a key driver of inflation is disappearing. Most economists consider a further rise above the current highs of eight to nine percent to be unlikely in the medium term. Nonetheless, inflation is here to stay. Analysts are currently expecting inflation of between three and five percent for the next few years. This means that sight deposits or time deposits will not offer any capital preservation in the future either. Tangible assets such as shares therefore remain without alternative. The recession offers an opportunity for entry.
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by Markus Richert, CFP® and Senior Consultant Wealth Management at Portfolio Concept Vermögensmanagement GmbH in Cologne
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