Worried about a recession? Here’s what investors need to know

Typically, a recession is characterized by two consecutive quarters of negative gross domestic product (GDP) growth. GDP is a measure of the total market value for all goods and services produced by a country. But GDP alone doesn’t tell you the full story about the state of the economy… the bigger picture can be much more intricate.

To gauge the scale and impact of a recession, it can be helpful to take a broader view of the economy. Recessions can have a widespread impact on the economy and people's lives, with consequences such as business closures, job loss, and/or reduced spending (see Figure 1).

Figure 1 : Key economic indicators

Economic indicators can help assess an economy’s health and give clues as to the direction it’s headed. Indicators are often interconnected; a shift in one can influence others but their exact behavior can vary from one recession to another. Click each economic indicator to learn more about their direction during economic downturns.

The economy is cyclical, experiencing ups and downs as the economy expands and contracts through a full business cycle. Like the seasons of the year, where spring follows winter, economic cycles are characterized by fluctuating periods of growth and decline, with times of economic expansion naturally following periods of recession and contraction (see Figure 2). The key takeaway is that recessions are a normal part of the economic cycle.

Figure 2: The economic cycle

This graph illustrates the economic cycle, depicting the fluctuations in real GDP over time. While it shows alternating periods of expansion and contraction, the long-term trend of real GDP maintains a steady upward trajectory, as indicated by the dashed red line. This demonstrates that despite short-term economic volatility, the overall economy tends to grow over extended periods.

While all recessions are defined by a slowdown in economic activity, what causes them can vary from one recession to another. The severity and duration of each recession can also widely differ:

Many investors mistake the stock market for the economy, presuming a straightforward correlation between them. Yet, in reality their relationship is much more nuanced.

A diversified investment portfolio offers defense against the unpredictability of recessions. Here are some investment strategies that can help you navigate challenging times.

• Prepare for the unexpected. Building up emergency savings in low-risk, liquid investments when times are good can provide an important financial buffer during periods of economic uncertainty.
• Review your asset allocation. Your portfolio should maintain an appropriate mix of stocks, bonds, and other assets based on your risk tolerance, investment goals, and time horizon. A Scotiabank advisor can work with you to ensure your investments are aligned with your goals and risk appetite.
• Diversify, diversify, diversify. During a recession, some sectors may outperform others. Similarly, different countries around the globe can be in different stages of the economic cycle. Consider broadening your investments by investing in stocks and bonds from around the world to potentially benefit from growth in other sectors and countries outside of Canada.
• Keep calm and invest on. Remember that recessions are temporary, and panicking can lead to poor financial decisions. Avoid emotional investing; instead, staying focused on your long-term investment goals and remaining patient as the market recovers is usually the best approach.

Worrying about tomorrow shouldn’t take away from today. Scotia Portfolio Solutions are thoughtfully designed and diversified to help grow your savings over the long term and flexible enough to adjust for changing market conditions. So, you can rest easy knowing that our portfolio managers are regularly monitoring your investments and actively managing them to capitalize on emerging growth opportunities, helping to keep you on track to meeting your goals.