Guide to Recession - What Is It? Recession is a scary word for any country An economic recession occurs when the economy shrinks. During recessions, even businesses close their doors. Even an individual can see these things with his own eyes:
1. People lose their jobs
2. Investment lose their value
3. Business suffers losses
Note: The recession is part of an economic cycle.
If you haven't read that article, you can check it below:
What is the Recession?
Two consecutive quarters of back-to-back declines in gross domestic product constitute a recession. The recession is followed by the peak phase. Even if a recession lasts only a few months, the economy will not reach its peak after serval years when it ends.
Effect on supply & Demand - The demand for goods decreased due to expensive prices. Supply will keep increasing, and on the other hand, demand will begin to decline. That causes an "excess of supply" and will lead to falling in prices.
A recession usually lasts for a short period, but it can be painful. Every recession has a different cause, but they have the main reason for the cause of the recession.
What is depression? - A deep recession that persists for a long time eventually leads to depression.
During a recession, the inflation rate goes down.
How to avoid recession?
1. Monetary Policy
- Cut interest rates
- Quantitative easing
- helicopter money
2: Fiscal policy
- Tax Cut
- Higher government spending
3: higher inflation target
4: Financial stability
Unemployment :
We know that companies are healthy in expansion, but there is a saying, "too much of anything can be good for nothing."
During peak,
The company is unable to earn the next marginal dollar.
Companies are taking more risk and debt to reset the growth
Not only companies but investors and debtors also invest in risky assets.
Why does lay-off occur?
After the peak phase, companies are unable to earn the next marginal dollar. Now, the business is no more profitable. CCompaniesstart to reduce their costs to enter into a profitable system. For example - Labour
Now, Companies are working with fewer employees. Fewer employees must work more efficiently. Otherwise, they may be lay-off by the company too. You can imagine the workload and pressure.
You may argue that they should leave the company! Really? Guys, we just discussed the employment rate declines. How will you get a job when there is no job? Now, you get it!
Let's assume the effects of the recession on the common man:
Condition 1: He may be laid off.
Condition 2: Perhaps he will be forced to work longer hours. The company is unable to maintain a positive outlook. Fewer employees are doing more work due to massive lay-off. His wages decline, and he has no disposable income.
As a result, consumption rates are reduced, resulting in lower inflation rates. A slowdown in the economy is caused by lower prices, which decrease profits, resulting in more job cuts.
Four Causes of Recession:
1. Economic Shocks
2. Loss of Consumer
3. High-interest rates
4. Sudden stock market crash
1) Economic shocks - When there is an external or economic shock the country faces. For example, COVID-19,
2) Consumer confidence - Negative perception about the economy and the company from consumers who lack confidence in their spending power. Instead of spending, they will choose to save money. As there is no spending, there is no demand for goods and services. The absence of spending results in a lack of demand for goods and services.
3) High-interest rates - High-interest rates will reduce spending. Loans are expensive, so few people take them out. Consumer spending, auto sales, and the housing market will be affected. There can be no good demand if there is no lending. There will be a decline in production.
4) Sudden stock market crash - evade people's trust in the stock market. As a result, they do recall their money and emotion drives them crazy. It can also be considered a psychological factor. As a result, people will not spend money and GDP will decline.
Consumer Spending:
During the recession, consumers don’t have additional income called disposable income.
Consumer spending parts
-- Durable goods - Lasts for more than one year
-- Non-durable goods - Lasts for less than one year
-- Service - Accounting, legal, massage services, etc.
Durable goods surfer during the recession. Non-durable goods are recession-proof because their day-to-day fundamentals are not affected by recessions.
Let's take an example of two stocks,
ABC Food vs ABC car
But, will you stop buying food because of the recession? Will you reduce your consumption of toothpaste, bread, and milk?
The answer is "NO".
Consumers buy the same amount of food in good or bad times, On the other hand, consumers only trade in or trade off their car purchase when they are not only employed but optimistic about the safety of their jobs & confident that they could get a promotion or a high paid job with another employer. And People's disposable income is absorbed during the recession.
Consumer spending is the crucial point to displacing recession.
Auto sales:
As we discussed, few people buy cars during a recession. New car sales count as economic growth. You may have heard about 0% loans. The company facilitates a 0% loan to increase auto sales. Mostly, people repair their cars or buy old cars during the recession.
You may see a boost in the used car market and spare parts selling companies’ sales.
Home sales/housing markets:
I have a question now!
Which is your biggest asset? Most of you will say, my home!
New home sales are part of economic growth. Also, house price impact how wealthy consumer feel. Higher the home prices, the more they feel rich, and vice versa. When home prices are higher, consumers feel they are wealthy and they are willing to spend. But when house price declines, they reduce spending/consumption.
If your biggest asset price declines, you don’t spend and the economy takes a longer time to recover. A higher rate stops increasing the home price because they have to pay more EMI. central bank reduces rates during the recession, and the housing market rate boosts because the loan/EMI is cheap.
Interest rates:
Generally, interest rates decline during a recession. Central banks cut interest rates that’s why loans become cheap.
Benefits of Lower interest rates -
- - Boost in the housing market.
- - Increase sales of durable goods
- - Boost in business investment
- - Bonds and interest rates have an inverse relationship. An economic downturn tends to bring investors to bonds rather than stocks, which can perform well in a recession.
- - During the recession, interest rates are lower and banks higher the criteria for getting loans, so that people can face the abstracts while lending money.
Stock Market:
I want to clarify that, the stock market is not an economy. The economic cycle is lagging behind the market cycle and sentiment cycle. It gives me a chill as a technical analyst and a sad moment as an economics lover. Sometimes it's ahead, and sometimes it's behind. Recession = bear market .
Recession-Proof Industries:
* Consumer staples
* Guilty pleasures
* Utilities
* Healthcare
* Information technology
* Education
I will write about this in the future, but for the time being, let's get back to technical analysis .
