I keep seeing the ‘R’ word in the news. Recession! Are we in one? What actually is one anyway? And what difference should it make to our approach to stock market investing?
That latter question is very important, after seeing what the pandemic slowdown did to the stock market. That was a recession, from which we have only just emerged.
In general terms, a recession is a period when economic activity declines. Over the long term, we tend to see economic growth. But economies will inevitably slow some times, and even shrink a bit occasionally.
What is a recession?
There’s a more specific definition of recession used by economists though. A recession is usually defined by the economy shrinking for two successive quarters. Specifically, it’s gross domestic product (or GDP), but really it’s just about economic output falling.
So are we in one now? Technically, we can’t call it yet. UK manufacturing and services output has fallen to its lowest level since January 2021. And it’s a far bigger slump than economists were expecting.
It’s not an official recession yet. But I can’t see the UK economy getting back to growth in this quarter or the next. So I reckon it’s odds-on that a recession will be called as soon as two quarters of data are available.
Investing in a recession
What am I going to do to preserve my stock market investments against a likely recession? Well, I reckon a recession is the best time to invest, for a number of reasons. The key one is that the crowds will be doing the opposite, and selling out. That means shares will probably fall in price, and I’ll be able to buy more of them for the same money.
Good safe companies with a reliable business, solid cash flow, and no debt are worth buying at almost any time. But they’re even better when fear sends them down in price.
Time to be greedy
It’s time for me to act like Warren Buffett again, when he said in 1986 on the subject of trying to time the market: “Our goal is more modest: We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
An economic downturn can also help squeeze out overvalued stocks. Ones carrying big debts, paying out too much cash as dividends, and largely overstretched, are often knocked back to valuations that reflect their risk.
Overpriced growth stocks frequently fall too, even when the underlying company has solid long-term prospects.
Long-term opportunities
Stock markets simply don’t keep rising steadily, day after day. Instead, over the short term, we see frequent ups and downs. It seems obvious to me that our economy can’t possibly just keep going upwards in a straight line forever either.
Periods of recession, to me, are really nothing to worry about. They are periods of opportunity. So whether I’m looking for growth stocks, dividends for passive income, or whatever, I will continue buying.
I fully expect a recession to help me increase the value of my long-term investments.