5 Moves to build your financial resilience against recessions

Talks of financial recessions and various landing scenarios are circulating in domestic and global headlines. There’s no clear answer as to when and how a US recession will unfold (if it even happens), and how it will impact.

In this article, we will unpack the nature of recessions, what a recession entails, and historical market behaviours during economic downturns. We share a few practical steps on how you, as a Hong Konger, can build a robust financial foundation to weather global economic uncertainties and the aftermath.

How do you define a recession?

It’s a word we hear often, but what does a recession actually entail? A recession is a significant, widespread, and prolonged downturn in economic activity. In theory, it's typically defined as two consecutive quarters of decline in a country's real (inflation-adjusted) gross domestic product (GDP).

Some economists take a more comprehensive approach, examining various indicators such as nonfarm payrolls, industrial production, and retail sales to determine whether a recession is occurring. Not all recessions qualify as a global economic crisis though, one example being Australia going through a mini-recession in March 2020 due to COVID-19 and the bushfires experienced in the country. 

On the other hand, the 2007-2008 US financial crisis represents the other end of the spectrum, whereby a country facing recession quickly evolved into a full-blown global financial crisis.

Key indicators of an impending global recession

Is the global economy going to crash? There are several economic signals that can hint at an approaching recession:

1. Rising unemployment rate: As companies cut back on staff, the unemployment rate typically increases.
2. Declining personal income: A reduction in personal income minus government transfers often precedes a recession.
3. Reduced consumer spending: Declining retail sales may indicate a looming recession.
4. Falling industrial production: A decrease in manufacturing activity can signal economic trouble.
5. Inverted yield curve: This occurs when short-term interest rates rise above long-term rates, historically a reliable predictor of recessions.

As an indicator, the Sahm Rule recession indicator recently garnered attention,too.

It's important to note that recessions are a normal part of the economic cycle. Since 1945, the United States has experienced around 12 recessions, with the average recession lasting about 10 months.

While they can be financially challenging, understanding the nature of recessions can help you better prepare for and navigate them.

How markets behave before, during, and after a global financial crisis

Stock markets often anticipate economic downturns well before they officially begin. Here’s some research compiled about market performance during recessionary periods.

Pre-recession market trends

Stock markets typically peak about five months before a recession starts, though this can vary significantly. In some cases, the market has topped out as early as 22 months prior to the economic contraction. 

This forward-looking nature of markets means that by the time a recession is officially announced, much of the negative impact may already be priced in.

During the recession

During an economic downturn, it’s no surprise that markets will react negatively to a slowdown in companies’ growth and earnings.

The market typically falls from a peak to a trough of around 30% in a typical recession. In recent history, we saw this in 2020 during the Covid-19 crisis (-34%) and again in 2022 (-26%). 

Market returns are far from consistent and certain sectors tend to outperform during economic downturns, highlighting the importance of diversification. 

Post-recession recovery

Markets often begin to recover before the recession officially ends, not after. This pattern was evident during the global financial crisis:

• The US recession lasted from December 2007 to May 2009.
• The official recession announcement came in December 2008, a year after it had started.
• By the time of the announcement, stock prices had already dropped more than 40%.
• When the recession's end was declared 16 months later, US stocks had already rebounded significantly.

Rather than attempting to dodge the drawdown or to reap the recovery gains, which is notoriously difficult, investors can benefit from having a longer investment horizon. The best thing to do through a recession is to just stay invested. 

5 simple financial solutions you can consider to be recession-ready

While recessions are a normal part of the economic cycle, they can have far-reaching effects on individuals.

One should take ownership of their personal finances as uncertainty remains a recurring theme into the future. This especially resonates as we experience the rising costs of living. 

1. Build your rainy-day reserves

Start by establishing a substantial emergency fund. Aim to save 3-6 months' worth of living expenses in a readily accessible account. This financial cushion can provide crucial support during an unexpected job loss or income reduction.

2. Keep your emergency fund liquid but rewarded

While it's important to maintain easy access to your emergency savings, that doesn't mean they should sit idle. Consider low-risk, liquid investment options that offer better returns than traditional savings accounts.

However, be cautious not to compromise the primary purpose of your emergency fund – immediate availability when needed. Having this safety net allows you to navigate economic uncertainties with greater confidence.

3. Tackle high-interest debt

Prioritise paying off high-interest debts, particularly credit card balances. By eliminating these financial burdens, you'll free up more of your income for savings and investments. 

4. Assess your career and earnings potential

Don’t wait till uncertain times to evaluate your income and earnings potential. Regularly review your career options and strengthen your professional network. Consider upskilling or diversifying your expertise to enhance your employability. 

Additionally, explore alternative sources of income to supplement your wage. This can diversify your options and increase your resilience in a challenging job market or global financial crisis.

5. Stay invested, if financially possible

During economic downturns, the best investment strategy is often to stay invested if your financial situation allows. Research shows that markets tend to anticipate recessions and recover before they officially end. By remaining invested, you position yourself to benefit from potential market rebounds.

Dollar-cost averaging

Employing a dollar-cost averaging strategy can be particularly effective during a financial recession. By investing a fixed amount regularly, you can potentially keep buying as the market dips and reduce the impact of short-term market fluctuations.

Avoid knee-jerk reactions with your investments

During economic uncertainty, it's tempting to make drastic changes to your investment portfolio. However, staying invested through market volatility is often more beneficial in the long run. Besides dollar-cost averaging to navigate market fluctuations, diversify your portfolio across different asset classes and sectors to spread risk.

Remember, markets often rebound quickly, and missing out on these recoveries can significantly impact your long-term returns.

Your resilience reading pack

Financial preparedness has been a key pillar of overall wellness that provides comfort in a world of rapid change and uncertainty. 

Is a recession coming? That’s not a question we can answer but to ease your mind, here’s your comforting resilience pack to read up about financial planning, personal finance, and building resilient finances through life stages and for the long term. 

Uncertainty will remain a recurring theme into the future. Get prepared and stave off the impacts of an economic slowdown on your personal and household finances.

Click here to get started on your investing journey with Endowus Hong Kong and subscribe our weekly newsletter to receive insights on market updates and tips on personal finance. 

Or schedule a 1-on-1 free consultation with our SFC-licensed advisors, who would be more than happy to advise you on your personalised wealth management needs.

Read more:

• Your 5-step guide to financial planning
• How not to be thrown into emotional circles when investing
• A rainy day fund: Why every Hong Konger should have one

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