Fears of a global recession have been growing since 2019, when Covid first hit the worldwide population and, subsequently, the economy. Some economists believe there is a 98.1% chance of a global recession,
This article will explore the causes of recessions and standard practices to help you plan your trading strategy for future recessions.
What leads to the global recession?
Many factors contribute to the global recession. But rather than giving you a general overview, let’s zoom in and break it down so you can build a foundation of expertise on the subject.
Imbalance of supply and demand
A major factor behind any global recession is the delicate balance of supply and demand that gets disrupted. Whenever there is an imbalance between consumer purchases and industrial production, economic activity declines.
Imbalances in supply and demand can disrupt the labour market, so employment reports are a strong indicator of trouble—companies experiencing a sudden squeeze cut labour costs and wages. Rise in unemployment, spending is falling, property purchases are falling, businesses are failing, bank debts are defaulting, and the economy is descending into a seemingly bottomless spiral.
Disappointing revenue reports from the most prominent companies may also indicate a decline. A storm may be brewing if all significant corporations report a decrease in sales.
Inflation on the rise
Distortions in supply and demand affect the rate of inflation. Inflation occurs when products or goods become more expensive. The term inflation, in simple words implies that the value of your money decreases. When a currency devalues, everyone feels it.
Inflation is not a different symptom of a global recession. But know that high inflation, even in times of high demand, can still weaken the economy and eventually lead to a recession, combined with the other factors mentioned in this article.
Rising interest rates
Interest rates reflect the amount of floating debt. It gets calculated as an annual percentage of all outstanding loans. When interest rates are low, companies (and people) can afford to borrow more money, and investment in new businesses stimulates the economy.
High-interest rates mean higher debt payments, less cash flow for spending, and an increased likelihood of debt default. Banks offset their losses by raising interest rates further, and another downward spiral begins, fueling a global recession.
Unstable political climate
Pandemics and war can destroy our energy infrastructure and strangle supply chains. And, of course, when supply chains break, prices inflate. Embargoes and other inconsistent policies can cause consumer prices to rise, negatively affecting consumer spending.
Governments and economists are constantly trying to improve the economy and maintain a stable market, but changing one aspect of our financial ecosystem can have untold effects on others. Sometimes interfering with an ecosystem, even with good intentions, can have disastrous consequences.
So, looking at 22Q4, do you see a supply-demand imbalance, elevated inflation, rising interest rates, and a volatile political climate? Undeniably yes. All the signs are there.
Business sentiment may also contribute to a global recession
Regardless of the economy’s health, if the world’s media warns everyone of a worldwide recession, social and market sentiment can collapse in less than a week. Imagine scrolling through your preferred news channels and business sites and seeing stories claiming the economic downturn is here. You can naturally feel fear. Who wouldn’t?
Perhaps these concerns would put you off shopping and possibly delay the purchase of that new car you’ve been thinking of. If everyone feels this way, the world will witness a self-fulfilling prophecy. Everyone freaks out and squeezes their wallets tight, which can trigger a recession.
Right now, financial news sites only supplement their news feeds with the occasional warning of an impending recession. Traders still determine when or if an economic downturn will occur fluctuating sentiment.
Stock market: effects of the recession
Even a so-called safe harbour asset like gold still involves risk. Gold and oil are traditional places to park wealth when the economy suffers, but they are incredibly unpredictable these days. Traders on a tight budget can stop out for the day only to see the markets move in the right direction the next day.
In contrast, stock trading during a recession is a bit more predictable. If the next significant downturn hits, we all know which way stocks will go. If you’re a stock trader, there are three optimizations to consider if or when a global recession hits. Nothing will always be guaranteed, but professional traders have routinely used these practices to minimize trading risk during a downturn.
Trading in consumer goods
Consumer staples are defensive stocks. These are essential products consumers use, such as food and beverages, household goods and pharmaceutical products, and even recreational products such as alcohol and tobacco. Defensive stocks typically rise during a global recession, so a well-timed long/buy is worth considering.
Cyclical stocks refer to companies that offer products and services in high demand during times of prosperity. Cyclists hit hard when the going gets tough. Typical cyclical companies are restaurant chains, hotel chains, airlines, and automobile manufacturers. Cyclical stocks are usually among the first to fall during a global recession, so consider a short order.
Trading cash cow stocks
Cash cows are companies with large cash reserves that allow them to survive or even thrive during a global recession. They are simply better able to cope with an economic downturn due to their vast cash reserves. They are still moving forward and upward, albeit with reduced capacity. A long buy option worth considering.
Should you trade commodities during a global recession?
Commodity trading during a worldwide recession is best avoided unless you are an experienced trader. If you choose to exchange items, review the history of your chosen asset’s behaviour during previous downturns, but as the disclaimer states, past performance does not guarantee future results.
Trading cryptocurrencies through the downturn
If you’ve been trading cryptocurrencies for over a decade, you’ll know that cryptocurrencies are far from recession-proof. Countries entering a global recession with high-interest rates and other financial problems are hit much harder than countries in a more stable position.
Be aware that the central bank or government may decide to take some of the burden early on and artificially lower interest rates, so don’t expect it to be a long fall.
Global recessions seem to be a necessity that gives our ever-expanding economy a reset. Nothing can grow forever. Those who have been trading for a while know that what goes up must come down occasionally. A recession creates a new balance or foundation from which to build again.
Global recessions are occurring more frequently than at any time in history, but the good news is that they also appear to be ending more quickly. Governments, the Federal Reserve, and the big banks have learned from previous downturns how to recover, so the next one may only take a year. Maybe less. So no, it’s not all doom and gloom after all. Be ready to take advantage of every advantage that comes your way.
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Disclaimer: Crypto products are unregulated as of this date in India. They could be highly volatile. At Unocoin, we understand that there is a need to protect consumer interests as this form of trading and investment has risks that consumers may not be aware of. To ensure that consumers who deal in crypto products are not misled, they are advised to DYOR (Do Your Own Research).