In the Stock market 2023, we probably will have a Recession. it is part of our cycles. In addition, recessions can lead to market collapses or corrections. But it can be a good opportunity when a recession hits. Effective investment in a recession can result in smaller losses and leave more cash for reinvesting in cheaper prices. This article shows how investors navigate economic downturns and how good recessionproof investment options are possible.
If you would like to read more about it check my latest post on How to invest your money in your 20s
Table of contents
- Is America in a recession yet?
- Is it safe to invest during a recession?
- Will the stock market recover in 2023?
- How do you profit in a recession?
- Sectors that tend to perform well during recessions
- Will there be a crash in 2023?
- Assets price bubble
- Conclusion
Is America in a recession yet?
A recession is defined as two consecutive quarters of declining GDP.
the closer you look, the more you find that this occurs much more frequently than expected.
There have been 18 recessions since the 1940s, the longest of which lasted 18 months.
The shortest lasted about two months during the Covid-19 lockdown,
and since 1900 the average recession has lasted about 10 months with mostly not-so-good effects.
To prepare for what’s to come, it’s first important to understand what kind of downturn we might experience,
because contrary to what most people think,
there’s a big difference between how you’d approach a recession or a depression and a total financial crisis.
In recessions, we usually see a complete economic downturn in our economy, including job losses, as companies anticipate lower profits.
Businesses try to cut costs, and that usually starts with laying off employees to reduce their overhead,
with wages falling and income lost for every percentage point that the unemployment rate rises.
Is it safe to invest during a recession?
Stock prices can fall during recessions.
In fact, it is not a bad idea to invest in a portfolio, but a portfolio left alone can avoid recession losses unless sold.
It’s even more important that a lower stock price offers an excellent chance to invest cheaply. Investing during a recession can be a good idea, but only in a number of conditions.
buying stock when they’re only temporarily trading well below their value because the market as a whole is being driven down and they can cope with that, even though they’re so great value.
you understand business
the wide moat that makes it very hard to compete with, and what that moat does in a recession or economic downturn is it allows them to remain profitable and continue to make money while their competitors struggle to survive
you need management that’s talented and has integrity and doesn’t use a recession as an opportunity to get rid of its debt by wiping out its shareholders
Will the stock market recover in 2023?
Less private investment as companies scale, which in turn leads to less economic growth, and less innovation in the future.
However, when it comes to making money during a recession,
there’s good news or bad news depending on how you look at it,
A recession by itself has very little correlation with it because some recessions have a positive effect on its returns.
In other words, out of all recessions, half had no correlation with stock values,
but when the market falls, we see an average decline of 28 percent.
How bad could it get?
Broadly speaking, these are the types of declines you should be aware of when building wealth.
The first is the so-called stock market correction,
which is defined as a drop in price of at least 10 points,
with the normal volatility of the market being very common.
The S&P 500 has averaged a five percent pullback three times a year, so there are always random fluctuations.
This is also the case with market corrections, which occur on average every 16 months with a 15 percent decline and an average duration of 70 days.
A pullback is part of a regular business cycle, but after that, we move to the more serious category,
and that would be a bear market, which is defined as a decline of at least 20 percent from the top,
and that’s where we’re now, according to the data, that usually tend to last every seven to 10 years.
When it happens, it hits us hard.
During a bear market, stocks fall an average of a little over 35 percent over a 363-day period, but considering how bad it could get after that, we’re past the worst of it.
All I’d consider a stock market downturn to be a drop of at least 20% or more. in the entire market,
40% declines have occurred only three times. the FED (Federal Reserve) steps in when a financial crisis arises,
as with the dot-com bubble or the housing bubble and even the 2020 Covid-19 pandemic.
How do you profit in a recession?
The investors who statistically perform the worst are those who don’t buy further into the markets when they’re down.
studies have shown that the average investor just outperforms inflation with an annualized return of only 3 percent over 20 years.
The vast majority of investors follow the principle of buying high and selling low.
Now that you know what to avoid, these are the strategies that are statistically proven to make the most money,
and if you follow just a few basic steps, you’ll be much closer to getting rich in a recession when it comes to building wealth.
You need to understand which investors will be the biggest losers if you want to have the best chance of making as much money as possible over the next few years
What will the stock market do in 2023?
History shows that the market recovers after a recession and averages a 15.3 percent gain the following year, it’s one of the most profitable times to invest during a recession.
Not to mention that the market was one hundred percent in the green for the next three years after every single recession we’ve ever had.
If you invest in the S&P 500, you have an 80 percent chance of making money if you simply buy the board index like the S&P 500 at the beginning of the year and then wait.
Even though short-term prices can fluctuate depending on interest rates, supply and demand,
long-term values tend to trend higher, and declines usually only last a couple of years before recovering.
Current inflation situation
The typical shape of the curve peaks at the end of the meltdown,
when things get really bad, before suddenly getting better.
Let’s look at the data to see if it supports the argument that the worst financial crash in history is imminent.
U.S. inflation data for October came in much better than expected
2. Energy and food-related inflation slowed for the first time this inflationary period
Commodity prices also fell
Oil prices fell for the first time to about $ 80, just as they did in early January, a month and a half before Russia invaded Ukraine
Gas prices are still high, but have fallen sharply since the massive price increases earlier this year
Retail sales are still holding up, and despite high inflation, wages in the U.S. haven’t risen nearly as fast, meaning real wages are falling while unemployment remains at historically extremely low levels
This is a unique situation that we’ve never seen before.
These are all extremely positive signs, because although there was a risk that the inflationary wage spiral would kick in at the beginning of the year, it didn’t, and that means that people are facing a cost-of-living crisis
That means people are facing a cost-of-living crisis because they can’t afford things the way they used to, but it’s also the ultimate cure for high inflation because that’s exactly what kills demand and drives up prices in October.
Sectors that tend to perform well during recessions
Inflation is high and will remain high for quite a while.
Holding cash is a guarantee that your wealth will go down,
so the only way to beat inflation is to own productive assets like real estate and businesses and especially stocks.
When we buy stocks, we buy parts of companies.
In the short term, stocks may fall more, but over time, over the next two, three, four, or five years,
it’s guaranteed that stock companies will do better than cash.
For 2023, if you just hold the index, the s&p 500, it’s good enough,
you’ll do really well, but if you want to beat the S&P to get even higher returns, then you should hold companies that have the following characteristics.
What is a good investment in a recession?
we want to own companies that have high pricing power, essentially brand monopolies that are able to raise prices to pass costs on to consumers.
we want to own companies or stocks that require little investment to maintain their ongoing operations. That’s, we don’t like companies like airlines, automakers, or construction companies that need to constantly invest in new machinery and equipment to maintain their cost efficiency.
we only want to own companies that are making money right now, that are generating tons of free cash flow, and whose cash flow is increasing year over year.
we want to make sure the company is generating a high return on invested capital, which means that’s the best way to determine if the company’s stock will beat the market over time. As long as the return on capital is higher than the weighted average cost of capital, which includes the cost of debt, the company would be very successful.
we want to own businesses that are as essential to consumers as possible, where consumers like makeup or healthcare
are the companies that will do well even if we get into a recession.
Will there be a crash in 2023?
This asset crash is going to get much worse, even worse than 2008, look at the combined value of the U.S. real estate market and the stock market.
the combined value of the U.S. real estate market and the stock market,
they will be valued at over $80 trillion in the fall of 2022, which is absolutely crazy because the size of the U.S. economy, the GDP of America, is only $25 trillion.
Asset prices are literally three times the size of our economy the problem for stock owners, Homeowners, and those who own a lot of assets.
The FED interest rate increases will gradually reduce the value of their assets
because it’s important to understand that all of the assets that you see in the U.S. economy today,
whether it’s stocks or other securities, are losing more and more value.
Whether it’s stocks, houses, or cryptocurrencies,
you’ve to understand that these valuations are all based on artificially low interest rates that have been kept artificially low for the last 20 to 25 years.
Assets price bubble
The asset index and the interest rate index are inversely related: the more interest rates fell,
the more asset prices rose.
but now that interest rates are rising again, asset prices are falling,
which means there will be some great buying opportunities for those of you who’ve been patiently saving and hoarding cash.
How can it be that the crash in 2023 is worse than the one in 2008?
that seems almost crazy.
It’s about the data, it’s about the fundamentals, because if we look at the asset-to-GDP ratio chart,
we see that 320 is lower today than it was six months ago when it was 380,
but it’s still above the peak of the 2007 bubble, it’s still above the peak of the 2000 bubble,
which is absolutely crazy
Everyone that despite the recent correction in the stock and real estate markets,
we’re still in the biggest asset bubble ever,
and that’s ultimately why many people believe that this crash will be worse than 2008
Conclusion
As far as the 2022 year end we are still in a bear market right now, and the recession
Is coming, is it going to happen? Is this a time to own stocks? What should we expect from the stock market 2023?
Remember no one can predict the bottom exactly because there are too
many moving parts and variables but,
As far as the Stock market 2023 if you own good companies over time one, Year from now, five years from now,
it will beat inflation you’ll beat holding cash and it will grow your wealth.