<\/p>\n\n\n\n
To understand what a recession means for the stock market, it helps to understand exactly what a recession is.<\/p>\n\n\n\n
There are a number of definitions but put most simply, it\u2019s when there is a significant slowdown in a country\u2019s economic activity over a period of time. Generally if there is a decline in a country\u2019s Gross Domestic Product<\/a> (GDP) for two consecutive quarters (two three-month periods) then the economy would be seen as being in recession.<\/p>\n\n\n\n The threat of a global recession is looming large because of \u201conce-in-a-generation\u201d<\/a> factors such as the effects of the Covid pandemic and the war in Ukraine, and this has an impact on stock markets and investors across the world.<\/p>\n\n\n\n <\/p>\n\n\n\n A recession has a variety of negative effects that can be felt across society: increased unemployment as companies retrench workers; people spend less money on goods and services; companies cut down production as consumers buy fewer products and services; and wage levels come under pressure.<\/p>\n\n\n\n For the consumer, the cost of living can increase as prices of items like petrol and groceries increase. This leads to a reduction in their spending on discretionary (non-essential) items. Job losses can further affect consumers\u2019 income levels, while it can become even harder to find employment as companies look to reduce their wage bill and cut down on new hires.<\/p>\n\n\n\n <\/p>\n\n\n\n None of this is good news for the listed companies that trade on the stock market, or for those who have shares in these companies. Although the stock market is made up of individual companies that fulfil a wide variety of services and produce a variety of products, to a large degree the success of these companies is influenced by the broader economy.<\/p>\n\n\n\n If the economy is thriving, then companies (and their share prices) will tend to benefit. That means happy days for shareholders. And of course the inverse applies. If the broader economy is under pressure, or in a recession, then this will generally have a negative effect on listed companies, and their share prices.<\/p>\n\n\n\n All in all, a recession can be a scary time for investors, with wild swings in share prices, downward pressure on investments, and a distinct lack of stability and predictability.<\/p>\n\n\n\n So where does that leave you, the investor?<\/p>\n\n\n\n <\/p>\n\n\n\n When you start investing, one of the most important factors to take into account is your investment timeline \u2013 in other words, how long you want to keep your money invested for. This can differ depending on what your investment goal is. For example, if you\u2019re in your 30s and you are saving for retirement, then you\u2019ll be investing with a long-term horizon. If you\u2019d like to cash in your investment for a house in the next two years, then that would be considered a short-term investment horizon.<\/p>\n\n\n\n During a recession, when investments have generally reduced in value, it helps if you have a longer-term horizon<\/a> and don\u2019t rush to access your investment if you don\u2019t need to. All markets go through cycles, and eventually a recession will run its course. Cashing in investments during a recession, or \u201cat the bottom\u201d, can be avoided if you are able to sit tight and stick out the downturn. Yes, it\u2019s hard not to panic when you see the share price plummet, but panic doesn\u2019t make for good investment decisions.<\/p>\n\n\n\nTough times for consumers<\/h2>\n\n\n\n
Profits under pressure<\/h2>\n\n\n\n
Take a long-term view<\/h2>\n\n\n\n