What is a Recession? How To Deal With Recession?

It is said that victory comes from finding opportunities in problems. One such problem is the recession. It is a scary word that can damage multiple stakeholders in a financial system. The stock market is a part of the financial system, and recessions and the stock market often tend to have bad relations.

However, stock market investors can create opportunities out of the recession. Explore this article to understand more about the opportunities in a recession.  

This article will help you understand what a recession is, the causes of a recession, the effects of a recession on stock markets, and finally, 5 things to invest in when a recession hits.

What Is A Recession?

A recession means a phase of a significant decline in overall economic activities, which lasts for months or even years. Technically, a recession is defined as a decline in total output, i.e. real gross domestic product (GDP), lasting for at least two consecutive quarters.

Causes Of A Recession

There are multiple causes of a recession, and here are some of them.

Economic shock

An unexpected or unforeseen event that can dramatically affect the economy is known as an economic shock and can cause a recession. For instance, the COVID-19 pandemic, the financial crisis of 2008 and the great depression of 1929 are some examples.

Rising debt

Rising debt levels can be another reason causing the recession. When individuals and businesses take on debt heavily, the interest rates tend to increase to the level that makes it difficult for people to repay them. 

Growing instances of defaults and bankruptcies in the country can give birth to a recession, and the housing bubble-caused recession is a great example.

Excessive inflation

Inflation may not be bad for an economy; excessive inflation is said to be high when the prices of goods and services keep going up. In such instances, after a point, people would probably spend less than they used to. Thus, lower spending due to inflation can cause a recession. 

For instance, 1980 and 1981-82 recessions resulted from excessive inflation. 

How Recession Affect The Performance of Stock Markets

Macroeconomic conditions have a significant impact on the performance of stock markets. Generally, a recession indicates the bad performance of stock markets. When the recession occurs, most stocks, even the fundamentally strong ones, drop in market value. 

Companies often face difficulties in maintaining or growing sales and profit margins. Plus, investors are often sceptical about the companies’ survival. In such an instance, the investors quickly react to every positive or negative news. Therefore, the stock market tends to suffer from high volatility. Moreover, some investors may withdraw their money invested in stocks, thereby negatively affecting the stock market.

When the recession ends, and the economy starts rebounding, the stock market moves upward.

5 Things To Invest In When A Recession Hits

Investors might often feel there might be nowhere to invest in a recession. Though, that is not entirely true. Here are the 5 things to invest in when a recession hits.

1. Core sector stocks 
   
   Many investors often think of exiting their investments when they see their portfolio turning red due to an economic downturn. However, instead of selling in panic, you can consider investing in the stocks of the sectors engaged in selling necessary products. Those are the sectors that do well in a recession.
   
   For instance, people rarely reduce their spending on health care products, electricity, gas, food, household items, etc. Therefore companies selling those products are less likely to experience a significant decline in sales during a recession. Due to this reason, the stocks of sectors like healthcare, consumer staples, utility, etc., can offer steady returns even during a recession.

2. Dividend stocks
   
   The biggest problem for investors during a recession is to see the stocks in their portfolios losing value. There are chances that the stocks in your portfolio fall even below the purchase price. In such a case, you may feel that you are losing returns. However, there is one more way to get returns from stocks, and that is dividends. 
   
   You can invest in the stocks of well-established companies which have a long dividend history and healthy dividend growth rates. This way, you can earn some income until the economy turns upside. You can also consider investing in mutual funds that invest in dividend stocks.

3. Savings account 
   
   Having cash on hand is not bad; you may need it if you face financial difficulties due to a recession. However, having excess cash on your hand means losing potential returns. If you want the higher safety of your investment, you can put your money in a high-yield savings account. Though it may not provide hefty returns, it ensures you earn steady returns while keeping the principal safer. Plus, you can easily withdraw cash when you need it.

4. Real estate 
   
   In addition to the above options, you can consider investing in real estate when a recession hits. In an economic downturn, you may be able to buy properties at a lower price compared to a more robust economy. You can also rent out your property and create a source of steady income. Furthermore, you can sell them with healthy profits when the economy moves upward and real estate values start growing.

5. Exchange-traded funds (ETFs) 
   
   You can consider investing in exchange-traded funds in a recession if you can afford to bear short-term volatility. Exchange-traded funds are the baskets of securities traded on the stock exchange. Investing in this can help you diversify your investments and may offer you handsome returns in the long run.
   
   You can also consider investing in WealthBaskets through WealthDesk. We enable you to invest in readymade WealthBaskets, combinations of stocks and ETFs and reflect an idea, theme or strategy. SEBI-registered professionals build WealthBaskets.

Final Thoughts

A recession often makes people anxious, especially investors. However, if you are a long-term investor, you need not worry about the short-term fluctuations in your portfolio. Instead, you can use the recession as an opportunity to make your portfolio more robust. Look for companies with sound fundamentals, and review and rebalance the portfolio when required.

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