The Most Predicted Recession of All Time
Introduction to Investors' Number One Concern
Since the beginning of 2023, all market predictions were on a US and Global recession. The rationale was that a recession and high unemployment were thought to be almost guaranteed due to ever-rising interest rates in developed global markets.
Throughout 2023, discussions about this predicted recession were ongoing, which was investors’ number one concern.
A Predicted Recession
A predicted recession is very different from a recession that catches you off guard.
When an event is foreseen, asset allocators and investment managers plan accordingly. They stress test their portfolios, heed caution, and allocate them more defensively.
The same thing can be said about consumers and corporations. Executive teams in large and small companies alike plan for a predicted event and have a more conservative business strategy so that the business is not caught off guard.
This is not to say that a predicted recession doesn't hurt. It does, not when it happens, but when it is expected. The market drop in 2022 was due to just that. That is one of the primary reasons markets fell so badly when interest rates increased. It is because that's when the prediction started.
Surprise Economic Downturn
A downturn that comes as a surprise is entirely different.
Investors, consumers, and business executives have yet to plan accordingly, which shocks the system. These recessions usually come from a fault line in the system and, therefore, can have monumental effects on specific industries and individuals.
The Global Financial Crisis of 2007-2008 serves as a prime example of a surprise economic downturn. This crisis, which began with the collapse of the U.S. housing market and the subsequent failure of major financial institutions, was not widely anticipated and led to severe economic and market disruptions. Major economies plunged into recession and global trade slowed down significantly.
The worst thing about a surprise-type event is that it causes panic. The worst market downturns in history are when no one sees it coming.
And that's usually where you get panic selling. That's where you get disturbances in markets. That's where you get misallocations.
The case for diversification
We shouldn't be as fearful as we have recently seen for predicted recessions because the investment, corporate, and consumer worlds are well prepared for such circumstances. And what's unique about surprise recessions is that if they were predictable, everyone would be predicting them, and they would be forecasted.
Therefore, the only way to predict the unpredictable is to diversify.
To allocate to various sectors and as many companies across geographies as possible. Then, when we are surprised by an event, we know that our investments are diverse.
Returning to the earlier example of the Global Financial Crisis of 2007-2008, this event highlighted how diversification can be so impactful. Whilst many sectors suffered dramatically during the crisis, areas like consumer staples, healthcare, and utilities provided relative stability as they were constantly in demand. Post-crisis, the market makeup shifted significantly, moving from a high financial services allocation to a much higher technology allocation. This change was partly driven by the rapid innovation and the growing reliance on technology solutions in the recovery period.
Whether facing a predicted recession or navigating the unexpected shock of a surprise downturn, the key lies in strategic preparation and diversification. By understanding the different nature of these economic events and adopting a diversified investment approach, individuals, businesses, and investors can build resilience against market volatility.
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