It’s difficult to predict exactly how a recession in 2023 would affect the average investor, as recessions can have a wide range of impacts on the financial markets and the economy. However, in general, recessions are characterized by a significant decline in economic activity, which can lead to reduced profits for companies, lower stock prices, and increased unemployment. These factors can all have negative effects on investors, especially if they are heavily invested in stocks or other assets that are sensitive to economic conditions.
Some experts predict that an economic recession is on the way for the US, others explain that it is unlikely, and still others say that it will not happen. But if it does happen, how is the average investor affected? Let’s break this down.
The economy contracted during the first quarter of 2022, as GDP decreased by 1.4%. This has been reason enough for experts and economists to foresee the beginning of a possible economic recession in the U.S. But what would this mean, if it happened, for the average American citizen?
A recession occurs when the economic activity of a country stops or slows down. The first to predict that one might be on the way to the United States were economists at Deutsche Bank, who say it could happen by the end of 2023 or early 2024. Experts at Goldman Sachs say there is a 15% chance of it happening in the next 12 months. Others think that the possibilities are few and really scarce. So far nothing is certain.
For a recession to occur, several factors have to come together, not just that the GDP has decreased or that the economy has slowed down in more than a quarter. Other factors have a high influence such as high levels of unemployment, slowdown in manufacturing, and falling wages, to name a few things.
One factor that can contribute to a recession is tight monetary policy. If the central bank raises interest rates too quickly or too high, it can slow down economic activity by making borrowing more expensive for businesses and consumers. Changes in fiscal policy can also have an impact on the economy. For example, if the government cuts spending or raises taxes too quickly, it can slow down economic growth. High levels of inflation can lead to a recession if the central bank raises interest rates too quickly in an attempt to control it, as this can make borrowing more expensive and slow down economic activity. Asset bubbles can also contribute to recessions. If asset prices, such as real estate or stocks, rise too quickly, it can create an asset bubble, which can eventually burst and lead to a recession. External shocks, such as a natural disaster, a sudden change in oil prices, or a global economic crisis, can also cause recessions.
Suppose that in the event of an economic recession, there are different ways in which your pockets could be affected:
The first one would focus on job loss, and that is when the economy slows down, one of the first reflexes is for businesses to cut expenses. This goes directly to increase the unemployment rate, so people could be in danger of losing their jobs, or to see their working hours reduced. And because employers are in financial distress, they can cut or pause productivity bonuses, and lock up any negotiation during job openings. Each one of these happened to me during 2022. I was cut from a gig I was doing online during the weekends. Our bonuses were down. Negotiations I had for a potential job were put on pause; the works.
“The common wisdom is that even in a recession, you have to cut your hair. Now it turns out that if a recession is caused by a pandemic, you cut your own hair,” said Wendy Edelberg, director of the Hamilton Project, in an interview with USA Today. For me this has translated into researching which companies have fallen in price but also fall into this category of asset. Think assets such as Waste Management (Stock ticker: WM) which is in charge of collecting the trash in several states. No matter what happens trash will need to be collected and it won’t be disposed of by individuals for a plethora of reasons, they also seem to have a moat through contracts with different cities. It would be really hard for another company to pop out from nowhere and become a strong competitor. At least for the foreseeable future.
During a recession, it is generally advisable for investors to be cautious and to review their investment portfolio to ensure that it is properly diversified. This can help to mitigate some of the risks associated with a recession, as it can help to spread out the impact of any potential losses across a range of different asset classes. It may also be a good idea for investors to consider increasing their allocation to cash or other safe haven assets, such as gold, as these may be less vulnerable to the negative effects of a recession.
It’s important to note that every recession is different, and the specific impact on individual investors will depend on a range of factors, including their specific investment portfolio, the overall economic climate, and their personal financial situation.
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