What is a recession?

The central theses

  • A recession is a period of sustained decline in economic activity.
  • The old rule of thumb used to be two straight quarters of negative economic growth, but now it’s up to the National Bureau of Economic Research to declare the onset of a recession.
  • Recessions can have many different causes and can be a challenging time for investors.
  • There are some unique investment opportunities for investors during recessions, such as B. Investments in precious metals or large caps.

It’s a timely question. What is a recession? We’re hearing the word absolutely everywhere right now. We all know it’s bad news, we all know we don’t want it, but what does that actually mean?

Economists and financial analysts have a habit of using a lot of terminology without properly explaining what the term really means. Most readers are tuned in enough to get the gist, but it can be useful to get the definition of these economic terms right.

Not only that, it is also very useful for investors. Recessions are inevitable. There have been many of these in the past and there will be many more in the future. It can often be a scary time to invest, but if you have a long enough time horizon, it can also be one of the best times to invest.

To do this, you need to understand how to navigate the investment markets when the seas are choppy. We can help you with this, and AI can too.

Download Q.ai today for access to AI-supported investment strategies. If you deposit $100, we’ll add another $100 to your account.

How is economic growth measured?

A recession is a metric heavily based on an economy’s level of growth. To properly explain what a recession is, we must first step back and look at how economic growth is measured.

In good times, consumers spend, people get raises, and life is generally good for many households. When this happens, the economy grows.

The most common measure of economic growth is what is known as gross domestic product or GDP. This metric adds up the total economic value created across all industries and jobs across the country. Whether you’re an accountant, a builder, a lawyer, or a janitor, all that work and value adds up to provide a guide to the country’s overall performance.

Because of this, when demand for goods and services increases, more is produced and the economy grows through higher GDP.

Let’s take a very simple example of a supermarket. In good times, the main breadwinner in a household may get a raise and the second adult in the household manages to get a part-time job. That means they have plenty of money each month so they can afford to buy nicer groceries.

They might do some shopping at Whole Foods, pick up the odd steak or two, and opt for branded granola and condiments. This means that the supermarket gets paid more by this household, which increases GDP.

On the other hand, during a recession in the same household, the primary wage earner’s salary could stagnate and the secondary wage earner could be laid off. With less money each month, they could stop going to whole foods and start eating cheaper meals. Now this supermarket is receiving less money from the budget, meaning it won’t add as much value to GDP.

This is the same in all sectors of the economy. In times of economic prosperity, we buy more clothes, more sneakers, more vacations, more iPhones, and more makeup. When times are bad, we buy fewer or choose cheaper options.

What is a recession?

In very simple terms, a recession is a period of sustained negative economic activity when the economy is contracting and households have less cash to spend. Traditionally, a recession was when the economy had two consecutive quarters (six months total) of negative economic growth. Nowadays the definition is a bit more complex.

While the old definition is still used as a good rule of thumb around the world, in the United States it is now up to the bipartisan government agency, the National Bureau of Economic Research (NBER), to announce when a recession has officially happened.

They look at a wide range of different data to make the decision that goes beyond simply measuring GDP. In many ways that makes sense. For example, under the old definition, it just wasn’t possible for a recession to last less than six months. The world is moving incredibly fast these days and we have seen how quickly the economy can change at the onset of the Covid pandemic.

This was the shortest recession ever, lasting just two months. According to the old definition, it would not have been a recession at all.

The flexibility also takes into account the complexity of the economy. We are witnessing a great example of this. Economic growth was negative for two consecutive quarters in early 2022, and yet we have yet to enter an official recession.

That’s because there was other economic data that wasn’t quite as negative. During these periods of negative growth, the unemployment rate remained very low and consumer spending was high. Wages actually rose, but still fell in real terms due to high inflation.

What Causes Recessions?

Recessions can be caused by a variety of factors. As mentioned above, the recent recession was caused by a global pandemic. This was new to all of us. A major shock to economies around the world is unusual, but other examples would be World War I and World War II.

Wealth bubbles and excessive debt are two other causes that often go hand in hand. The global recession of 2008 was caused by a combination of a global housing bubble backed by unsustainable levels of debt. When the bubble burst, many companies laid off thousands of workers and scaled back or shut down operations.

This led to a huge drop in economic activity and it was not surprising that a recession ensued.

Another relatively recent recession that stemmed in part from an asset bubble was the dot-com bubble of 2001. In the early days of the internet, huge amounts of money poured into brand new startups, many with very little business plans or prospects.

A domain name and a story were often enough to attract millions of dollars in venture capital investment, and the house of cards eventually collapsed. Added to this was the shock of the 9/11 terrorist attacks, which continued to panic the markets and spread fear in the economy.

There have been many other recessions throughout history that started for a variety of reasons. Some have been linked to interest rates, oil prices and high inflation.

How can investors navigate a recession?

Individuals face a number of challenges during recessions. The first is concern for their employment situation. When the economy shrinks, certain sectors are particularly vulnerable to layoffs and hiring freezes.

Other industries are more resilient to market factors, with many sectors experiencing less change in demand regardless of how well or poorly the economy is doing.

The other challenge is investing. Whether it’s extra money saved for a rainy day or a $401,000 value or an IRA, it can be difficult to watch your portfolio’s volatility increase when the news cycle turns negative and There are concerns about the health of the economy.

The good news is that there are many ways to invest during a recession that can limit the pain and even create opportunities for additional growth.

One of the most common ways to do this is by investing in assets traditionally considered “safe havens”. The best examples of this are gold and other precious metals, especially silver, platinum and palladium.

The history of precious metals as an investment goes back literally thousands of years, and even in our modern financial system, the price of gold, silver and others often rises due to bad economic news.

If you don’t know where to start investing in these types of assets, we have an investment kit that will do all the work for you. Our Precious Metals Kit uses AI and machine learning to predict how metals are likely to perform over the coming week and then automatically rebalance between them.

It is the perfect combination of centuries-old investment values ​​and the latest investment technology.

Another way to approach investing during a recession is to focus on large-cap stocks. When economic growth is stagnant or negative, large companies tend to outperform small and medium-sized companies. That doesn’t necessarily mean they will skyrocket and yield big returns, but they can often fall less or stay flat.

This is because they tend to have more diversified revenue streams, more stable costs, and don’t rely as much on new customers to meet their goals.

In and of itself, this isn’t the most exciting investment opportunity in the world. Losing less money is one thing, but ideally, as an investor, you want to grow your money.

To take advantage of this, we developed the Large Cap Kit. As the name suggests, it invests in large companies, but again, that’s not necessarily a winning strategy when the overall market is down. For this reason we are simultaneously long large caps and short small and mid caps.

Investors thus benefit from the relative change between large companies and small to medium-sized companies. This means that this kit can still generate a return even when the market goes sideways or down, as long as large companies hold up better than smaller ones.

All hope isn’t lost for investors in a recession, it just takes a little more work to find the trades that can work in turbulent times.

Download Q.ai today for access to AI-supported investment strategies. If you deposit $100, we’ll add another $100 to your account.

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