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What the stock market might need is a good recession

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There’s some debate in the US over whether the economy is in recession. From some angles, the US economic shrinkage for two quarters in a row would be all that’s needed. But it seems there’s some sort of subjective decision needed. All the uncertainty must surely be adding to bearish stock market sentiment.

Here in the UK, there are news stories galore about a possible recession. Some even suggest we might already be in one.

How to recession-proof your money,” screams one of the headlines. But what does it mean? It might help to think about the effect a recession might have on our shares.

Suppose economic growth should slow from, say, 2% to 1% over the course of a couple of quarters. What effect might that have on Unilever? Would people cut back on buying all the company’s food, drink, household and beauty products?

I really don’t think so. In fact, I doubt some consumers would even notice.

Negative growth

So what about a swing from 0.5% growth to 0.5% shrinkage? Would people suddenly stop spending and would Unilever’s sales suffer? Again, I don’t think most people would notice anything. The only difference would be the appearance of the R-word in the headlines.

What about a housebuilder like Taylor Wimpey? Will house sales be fine if the economy falls a little for just one quarter, but will it suffer if it happens for a second quarter? Or for however long it takes to hit a technical recession by whatever applicable definition?

I feel none of this technical recession business really matters. A lengthy period of economic shrinkage would surely harm the revenues and profits of a lot of companies. Some will be more at risk, while others will be safer in the long run.

But that’s nothing to do with the precise point at which “recession” is shouted from the Bank of England battlements.

Bring it on

Of course, the human impact of a recession can be catastrophic, particularly for lower-income families and those who might lose their jobs.

So why might it actually help for a real, official, recession to be announced? Well, when there’s an ongoing fear of a recession, most damage comes from the fear itself.

Until the worst happens, it’s still coming, at some time. And things are going to be worse tomorrow than today. At least, that’s the way a lot of investors think, especially many of the City folk whose investing horizon rarely stretches beyond the next quarter’s earnings.

So they’ll hold back, fearing a crash, and keeping their cash in their pockets for a better day. And in that way they make the gloom even gloomier.

Change the mood

So — in pure investing terms — I reckon the sooner we get an official recession, the better. When that happens, investors will start focusing on the next event. Rather than fearing the onset of a recession, they’ll switch to anticipating the end of it.

The markets will start looking for the light at the end of the tunnel. Right now, they’re afraid of the tunnel.

None of this matters to long-term investors, of course. Economies grow and shrink all the time, with more growth than shrinkage in the long term. And we just carry on buying cheap shares whenever we can.