What a recession would mean for the ASX
This week economists were predicting that there is an 80% chance that Australia could fall into a recession.
This normally evokes fear in investors, as they become more cautious and uncertain about the economy. A recession is generally defined as a period of economic decline, which typically involves lower economic activity, rising unemployment, and falling consumer and business confidence. So how does this affect the stock market?
It's reasonable to assume that in recessionary times companies may experience a decline in revenue and profitability, and as such investors may become hesitant to buy stocks. Investors also tend to assume that stock prices will fall as demand for shares decreases and, consequently refrain from buying shares. However, in my experience, investors are reluctant to sell their shares, especially if there in a loss.
So, does the stock market fall during a recession or is this a period of opportunity for those who are prepared?
We know in recessionary times interest rates tend to fall away, which can make stocks more attractive because they can offer potentially higher returns than other investments. Investors also want to buy shares in companies that will grow, which is why it's wise to purchase during times when the economy is slow in preparation for a growing economy and increased profits.
If we look at the 1929 crash and subsequent depression, the Australian stock market halved in value and fell to a low in 1931 before rising over 300%. In the mid-1970s, Australia experienced another recession and, once again, the market rose tenfold to the 1987 highs. In the early 1990s, Australia experienced a recession Paul Keating said we "had to have" and just like the previous recessions, the market rose strongly into the highs of 2002.
So, my advice to investors is regardless of whether a recession occurs, look at the next year as one of opportunity.
The best and worst-performing sectors this week
The best-performing sectors include Energy and Information Technology, as they are both up more than 1% followed by Financials and Industrials, which are both just in the green. The worst-performing sectors include Utilities and Consumer Staples, which are both down more than 1% followed by Healthcare, as it is just in the green for the week.
The best-performing stocks in the ASX top 100 include Allkem up more than 20% after it agreed to merge with the New York Stock Exchange-listed lithium company Livent. This is followed by Lynas Rare Earths up more than 12% and Pilbara Minerals up more than 8%. The worst-performing stocks include Block down more than 9% followed by Bank of Queensland, Treasury Wines Estates and Charter Hall, as they are all down more than 3%.
What's next for the Australian stock market?
Following a strong rise on Monday, the All Ordinaries Index drifted down more than the next three days with the market unfolding in a very normal manner. It now appears as though the market has hit my target zone of around 7330 points to find support and is now starting to rise again.
The market is currently down around 0.50%, and if everything unfolds as I suspect, the index should rise to close higher for the week. If this is correct, we will see it trade higher over the next one to two months to above 7800 points.
We still need to remain patient, as we need to see the market move up in a sustained rise to above 7,600 points to confirm the bull market has returned. There is plenty of time to take advantage of opportunities that will unfold, so I caution investors to resist the temptation of investing because of FOMO because jumping in too early will increase your risk, which may result in losses.
Get stories like this in our newsletters.