What will a recession mean for your investments?
Recent talk has turned to Australia being in an economic recession for the first time since 1991. A recession is a period of temporary economic decline, generally identified by a fall in Gross Domestic Product (GDP) in two successive quarters. The Australian economy contracted by -0.3% in the March quarter and since the enforced lock down of much of the economy we can surely expect a further decline in the current quarter. Many other countries are also heading for recessions.
We have seen stimulus packages worth trillions of dollars from governments and central banks around the world. This stimulus will not stop us from going into recession, but it might shorten the time frame.
The very real impact of a recession is generally seen and felt through high unemployment. Some economists are tipping unemployment rates of up to 20%. That means there is less money available to be spent which has a flow on effect on economic growth and on company earnings.
Most recessions have been associated with share market crashes. The good news, though, is that share prices generally fall before the recession kicks in and then start rebounding while the economy is still in a recession. Share prices in Australia have actually risen during the majority of recessions.
Share prices rose during 17 of the 20 recessions in Australia in the past 150 years. The last time share prices fell during a recession in Australia was in 1939, and they fell by only -1.8%.
We feel for the millions of people who will be out of work and for the many people who will have to make difficult decisions about their businesses as Australia works through this downturn. We will see a lot of negative headlines and talk of gloom and doom. However, if history is a guide, it may not be all bad news for share market investors.
** Thank you to our friends at Stanford Brown for the table.
The information in this blog post is general advice and does not consider your individual objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement. Should you have any questions please contact us on 02 9232 6800.