Recession – What Does it Mean.

By Jason Fittler

Recession is the new media hype; our office has been calling it since 2009.

"Australia from my perspective is in a recession, for long-term investors this means you need to focus on making sure you are holding blue chip stocks paying a high dividend yield. At the same time keep an eye on the growth stocks and maintain some exposure as once the recession’s starts to break these stocks will be very profitable."

There are many definitions of a recession depending on who you are talking to, a common agreement is two negative periods of GDP is considered a recession.

In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilization, household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

Some recessions have been anticipated by stock market declines. Ten recessions were preceded by a stock market decline, by a lead time of 0 to 13 months (average 5.7 months), while ten stock market declines of greater than 10% in the Dow Jones Industrial Average were not followed by a recession.

The real-estate market also usually weakens before a recession.  However real-estate declines can last much longer than recessions. During an economic decline, high yield stocks such as fast moving consumer goods, pharmaceuticals, and tobacco tend to hold up better.

However when the economy starts to recover and the bottom of the market has passed, growth stocks tend to recover faster.

There is significant disagreement about how health care and utilities tend to recover.

Diversifying one's portfolio into international stocks may provide some safety; however, economies that are closely correlated with that of the U.S. may also be affected by a recession in the U.S.

There is a view termed the halfway rule according to which investors start discounting an economic recovery about halfway through a recession. In the 16 U.S. recessions since 1919, the average length has been 13 months, although the recent recessions have been shorter. Thus if the 2008 recession followed the average, the downturn in the stock market would have bottomed around November 2008. The actual US stock market bottom of the 2008 recession was in March 2009.

Most mainstream economists believe that recessions are caused by inadequate aggregate demand in the economy, and favor the use of expansionary macroeconomic policy during recessions. Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow. Monetarists would favor the use of expansionary monetary policy, while Keynesian economists may advocate increased government spending to spark economic growth.

 Supply-side economists may suggest tax cuts to promote business capital investment. When interest rates reach the boundary of an interest rate of zero percent conventional monetary policy can no longer be used and government must use other measures to stimulate recovery. Keynesians argue that fiscal policy, tax cuts or increased government spending, will work when monetary policy fails. Spending is more effective because of its larger multiplier but tax cuts take effect faster.

Australia from my perspective is in a recession, for long-term investors this means you need to focus on making sure you are holding blue chip stocks paying a high dividend yield.

At the same time keep an eye on the growth stocks and maintain some exposure as once the recession’s starts to break these stocks will be very profitable.

Real Estate prices will fall as it becomes harder to obtain credit, as business owner’s focus on reducing business debt as opposed to lifestyle changes and households start to feel the pinch of increases expenses.  

Regardless of how much the Government tries to talk up the economy the tough times are still to come for us individuals.

For investors now is the time to buy those investments, which will provide you with the wealth in the long term being 3-5 years.