Lessons from recessions | What can investors expect?

Recessions happen for a variety of reasons, but there is always an imbalance in the economy that needs to be corrected to allow for new growth.

The Capital Group sees signs of an economic slowdown in some parts of the world, but sees it increasingly unlikely that a recession will occur in late 2022 or early 2023. The exact timing will depend on the pace and extent of actions central banks take to reduce inflation.

predictor

However, according to the Capital Group, a recession is inevitable next year. Unemployment rates, consumer confidence, and apartment building activity are commonly used metrics to predict a recession. According to the Capital Group, an analysis of eleven economic cycles in the United States since 1950 shows that an inverted yield curve is a very reliable indicator.

Here the relationship between 10-year government bonds and 10-year government bonds becomes clear. Once the yield on a two-year bond is higher than the yield on a 10-year bond, a recession usually follows within a year and a half. This reversal indicates that anxious investors prefer the safe option of government bonds over riskier assets.

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The Capital Group states that recessions often last for a relatively short period. Over the past seventy years, recessions have lasted between two and eighteen months, with an average of ten months. So US markets have been in recession only 15% of the time and the impact has often been rather limited. During the recession, the US economy shrank on average 2.5%, but during the expansion phase of the cycle, growth averaged 25%.

sectors

Moreover, Capital Group notes that not all sectors are reacting in the same way to the economic crisis. During the eight largest declines in the MSCI World Index between 1997 and 2022, consumer goods and non-services firms, among others, outperformed the index. Healthcare also stands out favorably by outperforming the index in seven of the eight periods. Companies in these sectors often pay large dividends, which can provide a consistent potential return in times of downturn.

fixed income

Finally, the Capital Group states that in times of recession, fixed income is often an integral part of successful investing. Between 2010 and 2018, global bond markets generated positive returns in five out of six corrections. However, current conditions are exceptional, given that bond investments were not a safe haven for investors in the first half of 2022.