It’s understandable to worry considering the constant headlines dance between inflation, interest rates, the cost of living crisis and the mortgage cliff. For investors, a recession may seem daunting at first, but its actual impact can be less severe than the media suggests.

We all hope that the Reserve Bank of Australia (RBA) can pull off a soft landing for our economy over the rest of 2023 and into 2024. But sometimes, it’s best to hope for the best and plan for the worst.

In order to do so, we think it is crucial to understand the business cycle and get clear on the intricacies of recessions.

A technical recession is defined as two consecutive quarters of negative growth in real GDP and is the common definition you’ll read about online or in the newspaper. Prior to the Covid-19 Pandemic Australia hadn’t seen a technical recession since the early 1990’s which is an unusually long time. There are some weaknesses in the technical definition, for example:

• If GDP had quarterly growth that was negative, followed by flat, followed by negative the economy may be looking weak but would not have realised a ‘technical’ recession.

• GDP numbers can be revised at a later date once more information becomes available. This can lead to both positive and negative changes to the GDP figure. Seasonality can also mean GDP numbers are volatile leading to large fluctuations in GDP growth. These factors can lead to false reads on how the economy is actually performing.

• GDP can grow due to population growth and the pure increase in output by having a greater number of contributors. A technical recession doesn’t consider that per person the GDP may be decreasing. This is considered GDP per capita and is used by some economists to exclude population growth from the GDP calculation.

A recession definition with less focus on GDP is one that is based on unemployment numbers.

The unemployment based rules are generally straightforward and take into account a predetermined increase in the unemployment rate. While simple in nature it again has some limitations, particularly around underemployment which looks at how well the labour force is being used within the economy and whether employees could be working additional hours.

It’s important to take a step back and remember your investing goals.As a long term investor it’s paramount to remember that downturns and recessions don’t last forever and they can potentially provide terrific buying opportunities. It’s crucial to consider the reasons why you’re invested in an asset in the first place and a good point in time to review your conviction in a position.

Taking a look at past performance of markets during and post significant downturns you can see that these drawdowns can bring opportunity to the right investment. While almost impossible to time the top and bottom of markets, a dollar cost average approach into high conviction well researched positions could lead to long term gains.

From an index standpoint you can see from the below graph some of the larger drawdowns in the S&P 500 index and the subsequent performance. Had you exited during these periods you would have missed some incredible growth from that point on.

Disney (NYSE: DIS) was launched in 1929 right before the great depression. The company navigated its way through four years of difficulty to produce its first feature film at the conclusion of the depression. It has since become a $165 billion dollar company.

Netflix (NASDAQ: NFLX) was established in 1997 pre dotcom bust. It didn’t take long though before things turned south and they approached Blockbuster to purchase a large part of the business. They were laughed out of the room but ultimately had the last laugh as they became the streaming mega giant they are today leaving Blockbuster for dead.

AirBnB (NASDAQ: ABNB) was created pre the GFC, born out of an idea to rent out air mattresses (the air in AirBnB) in the founders apartment floor so they could cover rent. The GFC hit and people began looking for more affordable accommodation options as well as a new way to make money. This created a new challenger for the hotel industry and the rest is history!

So rather than running from the markets if a recession is on its way it may be an opportunity to discover the next big businesses of tomorrow.

A little closer to home had investors left the market during the peak fear of the COVID-19 Recession they would have missed some significant share price appreciation.

Since late March 2020 companies such as REA Group Limited (ASX: REA), Fortescue Metals Group (ASX: FMG), Telstra Group (ASX: TLS) and Xero (ASX: XRO) are just some of the many companies that have bounced back off their lows.

The following Morgan Housel quote is about markets but is also transferable to recessions:

“Every past market crash looks like an opportunity, but every future market crash looks like a risk.”

Disclaimer:  ​Helloworld Travel (ASX: HLO), IPD Group (ASX: IPG) and Silk Laser Australia (ASX: SLA) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.