A recession is a financial state wherein economic activities reduce or contract for a minimum of six months or two quarters. Recessions affect both the government and the people. Due to reduced sales and low production, inflation soars resulting in job loss and reduced budget spending. Interest rates shift as the central bank cuts rates to support the economy.
The government now faces an increased spending budget driven by social security and unemployment insurance. The government also receives fewer tax revenues, and must now rely on reserves.
Another way to view recessions is the relationship between economic activity and consumer confidence. Whenever the economy shrinks due to redresses in business investments, there is an increase in economic stress. This triggers negative reactions such as:
- Businesses reduce labor forces (Layoff)
- There is an increase in unemployment levels driven by low hiring rates and job losses
- Wage increases become stagnant
- Consumers reduce spending due to financial insecurity.
According to USA Today, 58% of economists believe that there is a 50% chance of a recession in the next twelve months.
What Are the Best Assets to Hold During a Recession?
During a recession, it is always recommended to invest in recession-friendly sectors. These include healthcare, proven consumer staples, and long-term utilities. Some well-established companies that have been in business for decades, such as telecommunication sectors, may be able to withstand the recession.
During a recession, stock values will fall and may take hard hits before hitting the trough, or seeing recovery.
What Assets Should Be Avoided During a Recession?
During the crisis, it is best to avoid speculative or cyclical industries. These include retail, hospitality, manufacturers, startups, and retailers of high or luxurious consumer goods.
Even though recessions are usually downturns for most sectors, it is possible to benefit from them. One example is the high interest rates that are typical in the early stages. This translates into an advantage for savers who will earn higher on bank account balances.
However, as the recession creeps to an end, it may create an ideal moment for investors. Homebuyers may benefit from the interest cuts and other assets that decreased in value during the recession.
The recession can be a smart time to start long-term investment. Stock prices are lower, so it may be worth buying now and profiting from the upswing once the recession hits a trough.
