Would a recession be bad for the stock market?


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Today I was reminded about investor psychology and the old saying that if you follow the masses, you're probably going in the wrong direction. Everyone seems to be talking about a world recession in 2023, with some arguing that the US is already in recession and that Europe and the rest of the world will follow.

But is this really bad for the stock market?

The answer may surprise you because it is contrary to what the masses are spruiking, particularly as recessions are generally good for the stock market.

asx australian sharemarket

A recession is categorised as two negative quarters of GDP and Australia has experienced a technical recession in 2000, 2006, 2018 and 2020. Each time the market had a short dip before rising strongly. The recession in 2020 was a little different, as it was event-driven due to the COVID-19 pandemic, which saw the world quickly shut down while the other recessions simply slowed the economy.

The question right now is if Australia does go into a recession in 2023, will the stock market dip again? I believe this is unlikely, as the market is indicating that it will rise in 2023.

The COVID recession was a little over two years ago, and unlike what occurred after previous recessions, our market has not been overly bullish. Given what has unfolded in the last two years, including the increasing inflation and rising interest rates, I believe the market has already factored in a recession.

In essence, if everyone is thinking the market will fall and has already factored in the worst, then moving forward, the market must rise. The contrarian view that Buffett talks about rings true right now because if everyone is afraid of the stock market, this spells opportunity for those who remain unemotional and patient.

The best and worst performing sectors this week

The best performing sectors include Utilities up more than 3% followed by Industrials up more than 2% and Materials up more than 1%. The worst performing sectors include Information Technology, which is just in the red followed by Communication Services and Consumer Discretionary, as they are both just in the green for the week.

The best performers in the S&P/ASX top 100 stocks include Virgin Money up more than 16% followed by Whitehaven Coal up more than 9% and Evolution Mining up more than 7%. The worst performing stocks include the Star Entertainment Group down more than 7% followed by Wisetech Global down more than 6% and Block down more than 5%.

What's next for the Australian stock market

What an interesting week it has been given that the market fell away on Monday and looked like it would confirm our first down week in over a month but instead it turned to rise nicely. It is now seven weeks since the low on October 3 with the previous Bull Run on the Australian market lasting eight weeks between June and August.

While we would all like the market to just keep rising, we know it doesn't work like that and we need to be prepared for a turning point in the current uptrend. It's not a matter of if it will fall, just when and it is likely to be very soon. As I have stated previously, I expect the fall to last for one or two weeks with strong support between 7000 and 7200 points likely to stop the fall.

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Dale Gillham is chief investment analyst at Wealth Within Limited (AFSL 226347). He also serves as the head trainer at the Wealth Within Institute (RTO 21917). He has more than three decades of experience in the investment industry, and is the author of How to Beat the Managed Funds by 20%, Dale's qualifications include an Advanced Diploma and a Diploma of Share Trading and Investment. He co-hosts the Talking Wealth Podcast, and his work has appeared in The Australian Financial Review, New York Business Journal, Wall Street Select and more.