How Does Recession Impact Investors
Investors remain concerned as markets continue to fall and with monetary policy tightening stifling growth in the United States and worldwide. The Federal Reserve Chairman recently acknowledged that a recession was "certainly a possibility" even if it was not the central bank's goal.
They have been raising interest rates since March 2022 in an attempt to ease price inflation. Although the job market remains strong in the US, fears are that rising rates will tip the country into a recession. So what would a recession mean for investors and their portfolios?
The Markets
The New York Stock Exchange and the Nasdaq moved into positive territory for a period early this year, reflecting investors' concerns about the risks to growth posed by the Fed's planned rate hikes. Certain stock markets, such as real estate, healthcare, and utilities, were the biggest gainers in the S&P. Equally, the energy sector suffered from the fall in oil prices. The forex market has seen the dollar down against the other major currencies after three straight sessions of decline because of the decline in treasury yields.
The most well-established method for investors to prepare for a recession is to diversify their portfolios with a mixture of different asset classes. Investors also look to growth stocks to get them through such economic downturns. If we look at past recessions, such as the big 2008 crash, when both the S&P 500 and Dow Jones dropped around 10%, stocks such as Amazon (AMZN) and Booking (BKNG) grew by upwards of 50%.
Recession and Recovery
We have already seen a lot of volatility in the markets with extreme share price swings. If a recession kicks in, stock prices will inevitably plummet. Historically, investors react swiftly to news of significant shifts in the market in an attempt to keep their assets as safe as possible, some even exiting the markets entirely.
One popular option with traders in such an environment is CFD trading. Contract for difference means that investors can potentially make money both when share prices rise and fall. A bear market does not necessarily mean there is no way to make suitable investments and trades.
Although employment remains high in the United States and Europe, one of the first reactions to the recession is to cut payrolls, which in turn pushes down spending even further than we have already seen in the first half of 2022. Usually, once spending and investment have calmed down, prices and wages rise again.
In the long term, they viewed these periods of a downturn as something relatively favourable, with economies growing more robust than the last cycle of a downturn. But it is difficult to predict when each phase of a recession and recovery will occur, especially in the current volatile geopolitical climate.
Taking on board all the reports of recessions and inflation can seem daunting, but understanding the mechanics of the economic cycles can help investors to prepare and understand that it is simply a normal part of modern functioning economies.
For an investor, the important thing is to develop a well-thought-out strategy and diverse portfolios to counteract the effects of inflation and recession.