Recessions are terrible. A global or national economic slowdown might occur at any time. The rate of employment, industrial output, real GDP, the drop in retail sales, and the decrease in national income are often indicators of the economy’s substantial effects during this downturn or recession.
Bear markets are frequently accompanied by an economic recession that creates a bear trap and significant unemployment, but they may also present fantastic purchasing opportunities when prices are falling.
The National Bureau of Economic Research (NBER) employs a much more comprehensive approach to measuring recessions than the more straightforward (although less reliable) two-quarters of negative GDP measure by considering nonfarm payrolls, retail sales, and industrial production, among other indicators.
However, “no established rule concerning what measurements provide insight to the processes or the way they are weighed in our decisions,” according to the NBER.
In this post, we’ll look at what economic recessions are, how to see them coming, and how to prepare for them.
What is an Economic Recession?
An economic recession is a significant decline in economic activity, typically lasting for months. It is characterized by a fall in GDP, a rise in unemployment, and a general reduction in spending.
Recessions can majorly impact businesses, with many firms going out of business and others cutting back on investment and staffing. They can also lead to a rise in crime and social problems.
Government policy can play a key role in managing a recession, with fiscal policy (such as tax cuts or increased government spending) and monetary policy (such as interest rate cuts) being used to stimulate the economy.
The last economic recession in the United States began in December 2007 and lasted until June 2009. It was the longest and deepest recession since the Great Depression of the 1930s and had a major impact on the global economy.
What are the factors that lead to Economic Recession?
In India, the economic causes of recessions are often caused by a combination of factors, including high government debt levels, a widening trade deficit, and weak domestic demand. In recent years, the Indian economy has been particularly vulnerable to global economic conditions, with several factors contributing.
First, India’s export growth has been relatively sluggish, while its imports have been growing much faster. This has led to a widening trade deficit, which has put pressure on the country’s currency.
Second, India’s government debt levels are among the highest in the world, making the country’s economy vulnerable to interest rate hikes by the US Federal Reserve.
Finally, domestic demand in India has been relatively weak in recent years due to a combination of factors such as high levels of unemployment and slow economic growth.
These factors have contributed to many economic causes of recessions in India in recent years. In particular, the country was hit hard by the global financial crisis of 2008-09 and, more recently, by the US-China trade war. However, the Indian economy has shown signs of recovery in recent months, and it is hoped that this will continue in the coming years.
Impact of recessions on the Stock Market
Recessions have a significant influence on investors and the stock market as well. The stock market will respond to any changes in the economy and is impacted by the recession’s severe effects on the economy.
The stock market may decline and become more volatile for investors, but it also offers investors the option to buy equities at lower prices with a long-term investment perspective.
When it comes to investing during economic recessions, position size is one of the most important things to consider. This refers to the number of shares or contracts you buy in a particular security.
There are many factors to consider when calculating position size, including the size of your portfolio, the level of risk you’re comfortable with, and your overall investment strategy.
For example, let’s say you have a ₹85,00,000 portfolio and are comfortable with a 10% level of risk. Based on this, you would calculate your position size as follows:
₹85,00,000 x 10% = ₹8,50,000
This means you would invest ₹8,50,000 in each security you purchase.
Of course, this is just a general guideline – ultimately, it’s up to you to decide how much you want to invest in each security. However, it’s important to remember that markets can be very volatile during economic recessions, so it’s crucial to be mindful of your position size to minimize your risk.
What are the indicators of the recession?
Keep a close eye on these signs, which may indicate an impending recession.
Recessions and economic downturns are frequent aspects of the primary market or economic cycle. But even if they are unavoidable, they are only temporary. Market economic adjustment comes after recessions, and then economies recover. Fiscal stimulation measures also aid economic recovery.
The central bank and the government also influence the economy via fiscal and monetary policy, which includes adjusting spending, taxes, and interest rates.
Conclusion
Economic activities undergo recessions when they decline significantly for an extended period. They may benefit those who have set themselves up to benefit from economic hardship. Yet, as history has demonstrated, it is extremely challenging, if not impossible, to predict these events consistently.
By avoiding speculative investments and paying off debt, traders and non-investors alike may minimize some of the worst consequences of a recession by being aware of its warning indications.