What is a recession and what are its consequences for the stock and foreign exchange markets?
Lately, we have increasingly heard and read about the impending recession in the US economy and other countries.
But what is this market condition, and what consequences can it have for the value of securities or the national currency?
A recession is a period of economic downturn characterized by two consecutive quarters of negative growth in real gross domestic product (GDP).
Recessions are typically accompanied by rising unemployment, falling asset prices, and contraction in economic activity.
- Financial crises
- Energy crises
- Reduced consumption
- Political turmoil
- Natural disasters
What does a recession mean for the stock and foreign exchange markets?
The consequences of a recession for the stock and foreign exchange markets can be significant. In the stock market, stock prices typically decline, resulting in a loss of capital value for investors.
Due to losses, companies stop paying dividends, which further cools interest in the stock market.
As a result, investors sell their shares and prefer to invest in more stable assets. In parallel with the fall in the value of securities, there is also a decline in the prices of major stock indices .
A weakening economy is likely to lead to a decline in the price of the currency of the country in which the recession occurred.
In such situations, investors traditionally buy Swiss francs and gold, and more recently, cryptocurrencies .
2008 US recession
An excellent example of a recession is the economic crisis that occurred in 2008 in the United States.
This was one of the most serious crises in the history of the United States. Which was caused by a number of factors, including the mortgage crisis, the collapse of the subprime lending industry and the stock market crisis.
The 2008 recession led to millions of job losses, lower incomes and increased poverty. It had a strong negative impact on the stock and currency markets.
The stock market has fallen 50% from its peak in 2007. The foreign exchange market was also volatile and the US dollar depreciated against other currencies. For example, the dollar fell against the Swiss franc by about 25%.
But if a recession has already arrived, it is important to remain calm and not make hasty decisions after the price has reached its bottom.
Investors should diversify their portfolio early and invest in assets that have a low correlation with the stock market. Don’t forget to set a stop loss for transactions, as this is the only thing that can save you in case of sharp price fluctuations.
The duration of a recession can vary. Some recessions end within a few months, others can last several years. The duration depends on the depth of negative changes in the country’s economy and finances.
Governments and central banks can take measures to mitigate the effects of a recession. These measures may include:
- Lower interest rates
- Expansion of money issue
- Providing state guarantees
- Investments in infrastructure
These measures can help shorten the duration of the crisis and make it milder, however, they cannot completely eliminate the consequences of the recession.
Therefore, now it is advisable to reconsider your investment portfolio and, first of all, abandon investments in the US dollar and shares of American companies.