Mark Lister, 20 October 2022

There has been increasing talk of recession lately with comments from Jamie Dimon, JP Morgan CEO, as well as a bleak outlook from the International Monetary Fund (IMF) making headlines.

The full interview with Dimon wasn’t quite as dramatic as what made the headlines. He simply pointed out that there are a multitude of uncertainties, and that we all need to be prepared.

We’ll get September quarter gross domestic product (GDP) figures for the US next week, and these will be closely watched given such remarks from the boss of the biggest bank in America.

The first two quarters of this year saw small declines in US GDP, and some would say that already counts as a mild recession.

However, the National Bureau of Economic Research in the US considers more than just the change in GDP, and the modest fall during the first half might not make the cut.

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Next week’s numbers will probably look quite solid. The Atlanta Fed is forecasting annualised growth of 2.8 per cent, which would be the highest since last year.

It’s 2023 that has many people worried though, when the effects of this year’s interest rate hikes (and those that are still to come) are fully felt across the economy.

New Zealand often falls into recession at the same time as the US, but not always.

We did during the COVID-19 recession of 2020 and before that the GFC, but when the US endured a painful recession in 2001, we avoided it.

This period had only a muted impact on New Zealand (as well as Australia). International prices for our exports remained solid, and a weaker currency provided a further buffer for our export sector.

The housing market had also been weakening since late 1997 following a boom in the mid-1990s, which meant it wasn't particularly overheated when the US recession hit.

Some of those same factors are in place today, and if the US does suffer a recession in 2023 there’s every chance we’ll avoid one, or at least hold up better.

It’ll also important to remember that not all recessions are created equal, and they can sometimes feel more like a slowdown than a full-blown crisis, like the GFC was.

Sharemarkets usually fall during such downturns, because companies feel the brunt of lower economic activity, which means profits and dividends take a hit.

However, none of this talk is lost on investors. Sharemarkets look forward, taking all the information at hand and factoring it into today’s prices.

We’ve been talking about high inflation, rising interest rates and the prospect of an economic slowdown all year.

That’s why US shares are down 25 per cent from their peak, which came almost ten months ago.

There have been ten recessions in the US since 1960. During those periods, US shares have fallen by an average of 32.4 per cent, and the decline has lasted for 14 months.

There could be more weakness to come, especially if the economic outlook darkens. However, history would suggest we're a fair way through this already.

It’s also quite likely that if we find ourselves in recession, by that time the market will be turning its attention to the recovery.

Of those ten US examples since 1960, the S&P 500 has typically peaked about five months before the onset of recession and started to rebound 3-4 months before the end of one.

The best defence for investors is to hold a little more cash than usual, add to good quality fixed income, and ensure share portfolios are widely diversified with a tilt to the more defensive, resilient sectors that generate reliable dividend income.

For those who are buyers rather than sellers, such periods can bring as many opportunities as they do challenges.