Riding the Recession with Awareness, Planning and Investment


We were reading interesting news articles on Finance on the web when we came across this article predicting about a forthcoming recession. The opening statement caught our attention and set us thinking. It quoted Nouriel Roubini, president of Roubini Global Economics:

"The United States is headed for a recession that will be much nastier, deeper and more protracted than the 2001 recession"

Let us assume the worst-case scenario that the recession does come through due to the collapse of the housing sector which in turn would bring down the economy in a ripple effect. Well our assumption might as well come out true since home sales are cooling and prices are beginning to fall. Marilyn Lewis writes about how the prices of real-estate are declining in major metros in the article "Boom to bust, almost overnight".

Now the question that arises and needs to be addressed is:
"How do we take care of our investments and our daily needs during a recession?" After all we have invested our blood and sweat through our hard-earned money in various instruments such as stocks, mutual funds, bonds, real-estate, etc. If a recession does wipe out a significant part of our wealth in a very short period of time, it would really be of grave concern. It may land us in unprecedented trouble if we are unprepared. Since we do not like to be caught unaware we decided to dig deep in and do some research into the issue.The jewels that we unearthed in our digging helped us understand the phenomenon of recession and how we can prepare ourselves for it. They are presented as follows:

  • What is a recession?
  • Recession is defined as a period of economic retraction; when the economy actually gets smaller. Generally, two months of decline in the Gross Domestic Product (GDP) or a sharp rise in the unemployment rate, are red flags that a country is approaching, or in the midst of, such an economic contraction [2].
  • Wiki's definition and more info (technical jargon) for recession.
  • When did the last recession occur?
  • The last official recession was from March to November 2001. Here is an entire list of official dates of economic recessions in the US.
  • How does the market behave during a recession?
  • During a recession people spend less money since household incomes decrease. Consequently companies make less money, resulting in lower earnings and thus lower share prices. As a result the stock market gets hit first and hardest [2].
  • The lack of demand that hits the companies causes them to decrease inventories, cut down on productions and draw on their stored resources. This phenomenon makes employers lay off employees that are no longer needed causing unemployment to go up [2].
  • Work becomes scarce, there are more employees than employers and this causes the general wages to spiral down [2].
  • With falling output during a recession, revenue collections for governments go down. Fiscal imbalances may also be aggravated because the recession leads to the need for additional expenditures on social safety nets [3].
  • The market is a bear market or a slow economy [2].
  • How to prepare for a recession ?
Continued to Investing – Riding the Recession with Awareness, Planning and Investment - Part 2

References

[1] Nutting, Rex - "Recession will be nasty and deep" - Market Watch - Aug 2006.

[2] Kennon, Joshua -" Recession 411 - What it is and how it should affect your investments?"

[3] "Does IMF Fiscal Policy Advice End Up Hurting The Poor ? - Transcript of an International Monetary Fund Economic Forum, Washington D.C, April 2003.

[4] Carrie Coghill - "Post Recession Financial Planning Principles" - Physicians News Digest - May 2003.


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