What we learnt from past recessions

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Savvy investors understand that there are always good and bad times in the economy, and it appears from the recent economic commentary that we should batten down the hatches as a recession is looming.

But there are two ways to look at whether a recession is good or bad both from a household and an investing perspective.

The prospect of a recession is creating a dark cloud of doom and gloom across Australian households and the prospect of rising inflation and interest rates is placing enormous pressure on household budgets.

asx australian stock exchange fairfax media smh sydney morning herald black monday black tuesday crash panic wall street Traders at the Australian Stock Exchange in Sydney on October 20, 1987, selling off stock during the stock market crash. Photo: Anton

Given this, it is understandable that a recession would not be welcome but if we look beyond this as to how recessions have affected the stock market, we get a different perspective.

Before the brief recession in 2020 that lasted over two negative quarters of GDP, Australia hadn't experienced a recession since 1991-92.

In 1991 the All Ordinaries Index rose more than 29% and in 1992 it fell by 6% before rising more than 100% the following decade.

Prior to 1991, we experienced a recession in 1982-83, and in 1982 the All Ordinaries Index fell more than 18% before rising nearly 60% in 1983 and then nearly 200% into the 1987 high.

In 2020, we know the Australian stock market fell around 40% in just two months before rising over 80% into early 2022. Based on this data, we know that on average recessions last around 11 months and result in a bullish stock market.

Australia has largely avoided recessions over the past 30 years and while there is a small chance that one may occur in the near future, it won't be long or severe.

What we can learn from the data is that shares and property are likely to produce the greatest growth in the medium to longer term.

We also know that smart investors look beyond the current crisis, as they understand that a good investment strategy involves buying when the majority are looking the other way in preparation for the impending bull run.

Right now, the masses are not interested in the stock or property markets, as they are fearful, which spells opportunity for those who understand the dynamics at play.

The best and worst performing sectors this week

The best performing sectors include Information Technology up more than 6% followed by Materials, Financials and Communication Services, which are all up more than 3%. The worst performing sectors include Healthcare, which is just in the red followed by Consumer Staples, which is just in the green and Industrials up more than 1%.

The best performers in the S&P/ASX top 100 stocks include Iluka Resources up more than 18% followed by Block up more than 14% and Nine Entertainment Group up more than 11%. The worst performing stocks include Cochlear down more than 3% followed by Insurance Australia Group and Amcor, which are both down more than 2%.

What's next for the Australian stock market

Once again, we have seen that things can change quickly in our market, and more recently this has meant strong falls. However, the good news is that instead of the market falling, the All Ordinaries Index is currently up more than 3% for the week, which means the Australian market is now trading at levels it was four weeks ago.

But before you get too excited, the move this week was achieved on low volumes, which indicates a lack of support for the rise, therefore, it may not be sustainable. Yet again, I must say that it is still too early to tell if the low of 6581 on June 20 will hold and if the All Ordinaries Index has stopped falling.

For this to occur, we need to see the price rise consistently, given that over two of the past four weeks it has closed lower than it opened for the week.

A strong close on Friday and a good move up next week will start to allay my reservations, but I will not be convinced until we see the next down move.

The All Ordinaries Index will fall away for one of two weeks in the next month, and how far and long it falls will tell us whether the low of June 20 will hold.

As always, I urge investors to be patient because as we continue to experience, things can change quickly, and jumping in too early could result in a poor outcome.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.