Welcome to Chump Profit, your go-to blog for navigating the ups and downs of the economy and making profitable decisions. In this article, we'll delve into the topic of recessions, their impact on various assets, and how you can make informed trading decisions to maximize your gains.
The Economy: A Cycle of Ups and Downs The economy never moves in a straight line. Economists closely associate economic development with cycles of ups and downs, and recessions are considered an unavoidable part of the business cycle. A recession is characterized by a decline in GDP during two or more consecutive quarters, often accompanied by rising unemployment, falling retail sales, and contracting income and manufacturing indexes.
Preparing for the Inevitable Today, almost every US CEO is getting ready for a recession, and most economists believe a downturn is coming soon. Rising interest rates, triggered by an inflation spike, have the potential to choke off growth by increasing the cost of credit cards, mortgages, car purchases, business loans, and other forms of borrowing that fuel the economy. The last time the Fed delivered this much pain over a 12-month horizon was in 1980, resulting in a severe economic downturn.
In European countries, the situation is even worse, as the economy struggles with high gas prices ahead of winter. As businesses reduce gas spending, economic activity slows down.
Understanding Recession Duration Recessions vary in duration, and it's essential to have an understanding of their historical patterns. From 1854 to 1919, the average recession lasted 21.6 months. However, over the years, recessions have become shorter. According to data from The National Bureau of Economic Research (NBER), from 1945 to 2009, the average recession in the US lasted 11 months. In the past 30 years, the US has experienced four recessions, each with its own unique characteristics.
Recession Flashbacks: Lessons from the Past Let's take a closer look at some notable recessions in history to gain insights into their causes and durations.
The Covid-19 Recession (February 2020 - April 2020) The Covid-19 pandemic triggered the shortest US recession in history, lasting only two months. The sudden onset of the pandemic led to widespread economic disruptions, as businesses were forced to shut down and millions of workers lost their jobs.
The Great Recession (December 2007 - June 2009) The Great Recession, caused in part by the real estate market bubble, lasted for 18 months. Although not as severe as the Great Depression, its long duration and significant effects earned it a similar name. The economy took some time to recover from this recession.
The Dotcom Recession (March 2001 - November 2001) At the beginning of the 2000s, the US faced several economic challenges, including the bursting of the tech bubble and accounting scandals at companies like Enron, culminating in the 9/11 terrorist attacks. These events led to a brief recession, but the economy quickly bounced back.
The Gulf War Recession (July 1990 - March 1991) During the First Gulf War, the US experienced an eight-month recession triggered, in part, by spiking oil prices. The conflict created uncertainty and disrupted economic activity, leading to a temporary downturn.
Predicting the Unpredictable While predicting future recessions is challenging due to the uncertainty of economic forecasting, certain indicators can provide insights into potential downturns.
Inverted Yield Curve One indicator to watch is the yield curve, which plots the yield of a range of US government bonds. When long-term yields are lower than short-term yields, it is known as a yield curve inversion, and it has historically predicted past recessions.
Declines in Consumer Confidence Consumer spending is a crucial driver of the US economy. When consumer confidence declines, indicating people are less willing to spend money, the economy slows down. Sustained drops in consumer confidence can signal impending trouble for the economy.
Sudden Stock Market Declines Significant declines in the stock market can signify a recession, as investors sell off securities in anticipation of an economic slowdown.
Rising Unemployment A sharp increase in job losses over a few months is a bad sign for the economy and may indicate an imminent recession, even if the NBER hasn't officially declared it yet.
Asset Performance During a Recession Understanding how different assets perform during a recession can help you make informed trading decisions. Let's explore the behaviour of some key assets.
Oil: Recession Kills Oil During a recession, consumer spending decreases, leading to reduced demand for energy. As a result, the price of oil drops substantially. Monitoring consumer spending patterns can help predict drops in oil prices.
Gold: A Safe Haven Historically, gold prices have had an inverse relationship with recessions. When the economy weakens, the price of gold tends to rise. During recent recessions, such as in 2020, 2007, and 2001, the price of gold increased while the value of the S&P 500 decreased. This trend can be attributed to central banks implementing expansionary monetary policies during recessions, which can lead to global inflation growth.
Stocks & Crypto: Sector Performance Different sectors of the stock market are impacted differently during a recession. Companies in stable sectors like utilities, healthcare, and consumer staples tend to remain relatively stable. On the other hand, companies with high debt, such as travel, technology, and industrial companies, tend to underperform in the markets.
In the cryptocurrency market, most projects have high debts, and investors often opt to sell off crypto during a recession and return when the economy starts to recover.
Currencies: Safe Havens and Volatility During a recession, a country's business activity falls, and the economy slows down, which can lead to a decline in its currency. However, recessions usually affect multiple countries, spreading the economic impact. In such cases, currencies of countries with stable trading balances and significant foreign currency assets tend to benefit relative to others.
The US dollar (USD) and the Swiss franc (CHF) are considered safe-haven currencies. The USD strengthens against higher-yielding currencies when markets are unhappy with economic data or news. Similarly, the CHF attracts international investors in times of crisis due to political stability, conservative monetary policy, and a steady economy.
Trading Strategies for Recessions Recessions offer both traders and investors opportunities to profit, but it's crucial to have the right strategies in place.
Go Short: Seize Opportunities in Falling Markets Shorting is a strategy to profit from falling markets. Traders can use financial derivatives like CFDs (contracts for difference) to go short without owning the underlying asset. During a recession, the best assets to short are travel, industrial, technological stocks, and cryptocurrencies, as investors tend to sell off risk assets and projects with high debt.
Go Long: Capture Market Recovery Going long during a recession can be risky, but there are opportunities for profit when the market begins to recover. Investors often wait for the initial rebound when assets reach their minimum prices before buying in. The best assets to consider during an economic recovery include gold, travel, industrial, technological stocks, cryptocurrencies, and oil.
Conclusion: Navigating Recessions for Profit Recessions present opportunities for traders and investors to capitalize on market volatility and favourable asset prices. To succeed, it's important to understand the causes of the recession and the government's potential solutions, often involving ultra-soft monetary policies. By leveraging Chump Profit, you can earn by selling stocks, cryptocurrencies, and oil during a recession, while also increasing your capital through strategic investments in assets like gold when the economy rebounds.