I recently read an interesting article about the potential upsides that accompany a recession. With much talk of a recession in the coming months in Australia and one already on the cards in the USA, I thought it may be worthwhile to outline some of the positives that accompany the fear associated with a recession.
Ultimately, a recession will bring a slowdown in spending, a tightening in the job market and an increase in corporate restructuring and lay-offs. This, most people are aware of.
However, for those willing to use sound financial and business analysis, a recession can bring a wealth of opportunities and provide the necessary timing to enter a number of markets.
I like to think of a recession as a time where almost everything goes on sale because this outlines the number of opportunities that are available to the everyday person or investor.
What factors move the stock market? What about individual stocks? How do interest rates affect the stock market and what does this have to do with the Consumer price index and inflation?
Many people know that economic factors such as corporate profits and interest rates tend to influence the movement of the broader stock market. However, I found it particularly interesting to actually analyse how these factors move the market and whether one should follow such trends when purchasing individual stocks.
Corporate profits and GDP
A drop in the Gross domestic product (GDP), the market begins to fear a recession and a subsequent drop in corporate profits. With worsening economic conditions, the market may enter a recession resulting in reduced demand for many company’s products.
Following on from this, many company’s earnings will be affected and the corresponding company stock price will fall (rationale outlined below). Thus, when the GDP and corporate profits fall, the market will suffer.