Back to Investing

Why markets are going down and how to invest during a recession

Khanh Nguyen
|
May 31, 2022
Share
Why markets are going down and how to invest during a recession

You may have seen the news about markets going down lately.  The biggest indexes like the S&P 500, the FTSE100, and the Nasdaq have fallen to their lowest levels in weeks. With inflation at a 40-year high, investors are worried that worldwide growth is slowing down and a recession is getting very close. 

“What does this mean?”, “How further down markets will go?”, “What am I supposed to do with my investments?”, all your questions will be answered. 

A recession seems certain

First up, what is a recession? A recession is a period of decline in a country’s economic activities. The signs of a recession are mainly (but not limited to) energy price shocks, rising interest rates, a fall in the value of goods and services, and GDP dropping for two to three months in a row.

Let’s take a look at the UK economy:

  • Inflation in the 12 months to April at 9% - the highest rate in 40 years
  • Diesel and petrol prices keep hitting record highs due to Russia’s invasion of Ukraine
  • Energy bills are set to increase by £693 after the price cap is increased
  • The monthly figure for March GDP growth fell by 0.1%, after no growth in February
  • Interest rates are currently at 1%, after 4 times of increasing from 0.1% in December 2021
  • China’s struggle with Covid and Brexit trade restrictions continue to push up good prices
  • Business investment remains 9.1% below its pre-pandemic level

It seems to economists that the UK ticks every box, and the country could enter a recession in the second half of 2022. Or something slightly less bad: stagflation - where there is stagnant economic growth and high inflation.

What will happen to my investments?

It’s been a challenging year so far for global markets. The S&P 500 index has fallen over 15% in dollar terms, but since the US dollar has risen against the British pound, it makes a 7.5% loss for UK investors. The index finally touched the bear market last Friday (bear market happens when the index falls 20% from its recent high) 

In comparison, the FTSE 100 has only fallen 2.7%, thanks to oil and mining stocks making up most of the index. 

This might come as a shock to many have-a-go investors who just started pouring their money into the stock market during the pandemic and haven’t been through such a period of high inflation and high interest rates. 

Should I panic? 

No, no and no! Markets are on a decline now and they will probably continue to go further down in the next quarter, or even until next year, but you shouldn’t waste your time worrying about how your stocks are losing value. One thing that’s worth bothering now is the cost of living crisis and how to deal with it.  

Anyway, going back. There are two reasons why you should not hit the panic button just yet:

Historically, the markets have always gone back up

The S&P 500 and the Nasdaq have had 7 consecutive weeks of loss. 

Past returns don’t indicate future performances. Historical data has shown that after a losing streak of 6 weeks, the markets have returned more than 10% on average just after one year.

Bull markets return more than bear markets lose

According to data from the S&P Dow Jones Indices, 14 bull markets since 1932 have returned 175% on average, while 14 bear markets starting from 1929 have led to an average loss of just 39%. 

The period of a bear run is also much shorter than a bull run. On average, a bear market has only occurred once every four and a half years, and last for one year. 

How to invest during a recession

Be patient

Have a long-term mindset and rest assured that stock prices will rise back. If you have at least five years for your investments to grow, hold on to them and do not sell. 

Take advantage while stocks are on sale

This is a good opportunity for you to grab a bargain! Look for undervalued companies that was hit by lockdown but you think can get through the storm and do well in the future.

Spread the risk

Always diversify your investments. Hold a mix of different funds and shares from different industries, especially those that go up when markets go down.

Re-evaluate

Set limits for the lowest price that your stocks can drop, if they go below these numbers you may evaluate if the companies could prosper in the future, and consider selling.

Consider other inflation investments that balance out the effects of inflation

There are many other assets that have an increase in value when your money is losing value like precious metals and property or real estate investment trusts (REITs). 

The bottom line

A recession is predicted and there have been warnings that markets might keep going down for a while, so be prepared and stay calm knowing that if you are a long-term investor, these short-term fluctuations can’t harm you. They’re just a phase. Keep a diversified bunch of investments and make sure it matches your risk level because you will sure have to see some of them drop and it’s totally fine. In other words, keep calm and carry on!

Next topic
Quirk app logo

Get Quirk. It's free

Join the 30,000+ people in our community and start your journey to financial independence.

Scan to download Quirk
arrow
QR code to download the Quirk app