Knowing These Four Recession Trends Will Change How You Invest

Knowing These Four Recession Trends Will Change How You Invest
Theodora Lee Joseph, CFA

about 1 year ago2 mins

Now that inflation seems to have peaked, there’s only one topic on investors’ lips: the US recession. The chart suggests this is one of the most anticipated downturns in history, with investors stamping a 45% probability of a recession over the next 12 months. And that’s enough to convince optimistic bulls – believing the worst to be already priced in – to look toward a growth-heavy recovery with glee.

Thing is, you can’t be bullish until you can roughly forecast the shape of the recovery. Now, that’ll depend on the length of the recession, the steepness of the dip, and the timing of the recovery. Once you know that, you can start deciding how to position yourself.

These are the four most common recession shapes. (Sadly, they don’t work for any snazzy little anagrams.)

V: This is the dream recession shape, if there is such a thing. The economy would drop into a sharp but brief economic decline, then quickly rebound into a strong recovery. You might want to check out cyclical industries early in this cycle.

U: Just like the V-shape recovery, the economic decline is steep – but the recovery is slightly slower. Defensive opportunities could be a good pick throughout this cycle.

W: You might know this as a double-dip recession: the economy follows the V-shape recovery, but on repeat.

L: This is the worst outcome: this shape offers almost no hope of recovery from a severe recession, and the economy doesn’t return to trend-line growth in this scenario. You might want to look at safe-haven assets like gold and currencies like the Swiss franc and the Japanese yen, and tangible assets like real estate are also good to own.

So it’s true: unless you doubt that a recession will hit us soon, it’s probably time to be bullish. But how and when you invest depends on the type of recession – and remember: hope for the V, but prepare for the L.



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