All you need to know about the recession and what you should do?
“Recession is when a neighbor loses his job - Depression is when you lose yours”
- Harry S. Truman
Did you experience recession in 2008 ? Did you take any action during that time? How do you feel about the economy right now?
Let’s discuss the current state of economy and what you can do.
1. Are we heading for a recession? Many indicators signal in that direction. Home construction industry slowed . Home loan rates increased. The stock market is in bear territory. Layoffs in many companies/startups.
2. What is a recession? if there is two consecutive quarters of shrinking GDP. it can be considered as a recessions, it mean fewer jobs and lower wages.There is a possibility that consumers worrying about a possible recession could actually result into recession i.e. people spend less as they are uncertain about the future, then the GDP goes down.
3. Should I panic due to this? No need to Panic! If it occurs, it won’t happen immediately. I’d guess some time over the next six months.
4. Who gets hurt most by a recession? Lower-income people are especially impacted because they tend to be the first fired when the economy slows (and the last hired when it rebounds). Recessions also hurt younger people trying to get their footing in the job market.
5. What is reason for recession? This is due to uncertainty from the coronavirus pandemic and Russia’s invasion of Ukraine.
6.Whether inflation is more dangerous than recession?
Inflation and recession describe the poor health of economy. Inflation makes the economy moving forward at full speed, resulting into price surges and a higher cost of living. A recession means a slower economy marked by a decline in economic activity and very higher unemployment.
Inflation impacts household finances and lower middle class and middle class. A prolonged period of inflation means that prices will continue to increase and the same amount of money will buy you less and less over time.
6. What’s the link between Fed rate hikes and a recession? Interest Rate hikes increase the costs of borrowing — which results into slowdown in purchases of everything, including homes. This, in turn, causes the recession.
7. Do Fed rate hikes always lead to recession? No. It’s possible we could have a “soft landing” that lowers inflation without causing a recession. But Fed rate hikes often over-shoot, resulting in recession — especially when they’re on the scale the Fed is contemplating. In 1981, for example, the Fed under Paul Volcker raised interest rates so high (to reverse double-digit inflation) it plunged the economy into deep recession.
8. Whats the objective of Fed? Inflation in USA is highest in 40 years. Fed believes that hike in interest rate would ease inflation.
9. What you should do to manage your finance, life in recession
While recession might not confirmed, the likelihood of the same is higher than usual. In this period, rather than hoping that things will improve, one should behave wisely and work on the finance and savings, some of the action points could be as under:
Increase savings Savings. During recessionary period, liquidity is important. Don’t investment money in avenues where liquidity is stuck. We all need liquidity and importance of the same significantly increases during recession. Focus on saving and don’t spend on unwanted/unnecessary things. Avoid fixed expenses like mortgage interest, debt etc.
Upskill yourself. During recession unemployment shoot up and there will be layoffs. Upskilling is very important to stay relevant and active in your current job and also in the job market.
Avoid high risk things (e.g. joining startup without looking into their business model, starting up startup without validating the idea investing in crypto without research). Normally, taking calculative risk is a great thing. In recessionary period, take risks with proper analysis and research and see the worst possible scenario and then invest.
Don’t exercise your stock options (if you’re lucky enough to have some). Don’t be in a rush exercise your stock options, especially those with a high strike price. Options are great because they give you ahem optionality (and upside exposure). Assuming you have years left before expiry, it would be foolish to convert liquidity (i.e. cash) into volatile shares during a time when the value of liquidity is likely to rise (and the appetite for volatile things is likely to fall).
Look opportunity to buy the dip. Recession is also a great opportunity to invest the dip if your funds permits. Such investment should be made after doing proper research.
Build multiple stream of income: If you are doing job, you can build multiple streams of income by starting a youtube channel, writing a book, starting a newsletter. Generating income from these avenues takes time but in recession period, working on these additional activities give you confidence and also a way forward for your additional income.
Stay calm and know that this too will pass. Human psychology works in a different way. When markets are up, we think market will continue to boom. And when markets are bad, we think the sun will never shine again. But none of them is true — the truth is that things tend to be cyclical. The seeds of recession are sown during boom times, and the seeds for the next boom are sown during the recession.
Hope you like this article.