Many economists and financial analysts agree that there's a recession coming in 2023. When governments around the world get the current inflation crisis under control, the next step will be halted interest rate hikes or even reductions, and experts predict a brief but distinct period of shrinking economic growth.
I agree with this analysis. As a consumer, I'm prepared for a challenging economy. As an investor, I welcome the predicted recession with open arms.
Recessions 101
First, what is a recession?
It's typically characterized by a sustained decline in the gross domestic product (GDP) for two or more consecutive quarters. But this is just a general definition, as there are other factors such as job losses, a tight job market, and a declining stock market that often -- but not always -- accompany a recession.
Investors might feel scared during these times. But if you're a long-term investor and don't need the money you're investing for the next 10 years or so, the best course of action is to do nothing. If you're invested in a diverse portfolio of stocks or a passive index fund, the chances of losing money over a 10-year period is nearly nonexistent. This minimal risk only decreases as the time horizon for your investment increases.
In other words, short-term stock trading is risky, but long-term investing builds wealth over time. That buy-and-hold strategy can build a fortune. More time and firmer patience with short-term bumps in the road will engineer an even larger hoard of riches.
Wall Street's reaction to economic recessions
Now, let's talk about the stock market.
Throughout history, the market has moved in cycles. At certain points, stocks become overvalued, leading to a correction through a rough-and-tumble mix of sensible and overzealous selling. Eventually, the downturn makes stocks undervalued -- and the buying starts again. Drops in stock prices are a normal part of this cycle. In the long haul, the general market trend moves inexorably upward.
Recessions are an inevitable part of this multiyear economic cycle. According to the National Bureau of Economic Research, the typical economic downturn since World War II has lasted approximately 10 months in the U.S. However, recessions can range from two months, as seen in the 2020 COVID-19 recession, to 18 months, like the Great Recession from 2007 to 2009. Although they can be challenging for consumers, recessions eventually give way to expansionary periods, which tend to last much longer.
The long and short of it: Don't panic
Here are three big ideas to keep in mind as the economy most likely faces a recession in 2023:
- The market crash of 2022 was a correction to an overheated surge in 2021. Stocks are more comfortably priced now, neither overvalued nor undervalued in the grand scheme of things.
- Negative GDP growth is just a temporary dip in the road to sustained economic growth. Strong businesses will survive and weaker ones will be weeded out. That's life on Wall Street, and a perfectly healthy process.
- The COVID-19 crisis brought to light and amplified some economic issues, but they are being addressed. The process improvements and lessons learned will remain as the pandemic challenges fade away.
Being prepared for a recession is important, and 2023 might just be the right time to invest your saved-up cash in the stock market. Remember, recessions are a normal part of the economic cycle, and if you understand what causes them and how to prepare, you'll be able to weather almost anything the economy throws your way. In fact, you'll be prepared to build lasting wealth by investing in great businesses at low prices during the downturn.
What to buy when the storm is coming
For example, let's say you saw a buying opportunity in the subprime mortgage crash of 2008, but you jumped in too early and didn't take full advantage of that market bottom. The S&P 500 index fell another 41% after you picked up some top-shelf stocks on the cheap on Oct. 1.
But then the market winds shifted thanks to stronger banking regulations, a sharp cut in federal interest rates, and a massive quantitative easing program. That package fueled a strong recovery in the stock market. The S&P 500's total return since then -- including that 41% drop in the early days -- now stands at 362%. Undervalued industry leaders such as home improvement retailer Lowe's, health insurance giant UnitedHealth Group, and e-commerce veteran Amazon have delivered 10-bagger gains or more over the same period:
So I don't mind a brief recession at all. Many market-saving tactics that powered the last chart's gains are in play again, and I expect the global economy to recover completely from this malady in a year or two. After that, it's off to the races with a fresh bull market.
The gold-standard stocks you buy during a market panic can make you richer in the long run. Just make sure you're buying into companies that will stand the test of time. Robust balance sheets are important, and a clear path to sustained business growth is even more helpful. With these criteria in mind, I'm buying media-streaming technology expert Roku and eternal high-growth start-up Amazon hand over fist right now. You should stop worrying about an incoming recession and grab some outstanding sector leaders while the getting is good.
