The question of whether an economic recession is about to happen is more than imminent today. The Federal Reserve has been increasing interest rates gradually over the past year to tame inflation. As we know by now, increasing interest rates makes the cost of borrowing for consumers and businesses expensive, which slows demand for goods and services, hence slows economic growth. For a while, many thought that the possibility of a recession was no longer a threat but this possibility resurfaced since the failure of SVB, Signature Bank, First Republic, and even Credit Suisse. Bank runs, an economic phenomenon we thought long gone, has resurfaced again and made financial markets very unstable and volatile. It must be said that we are, indeed, not far from a possible recession if the economic situation continues in this direction. The question is, who generally benefits from an economic recession?
First, when a recession occurs, asset prices are all down. Stocks, bonds, real estate,…etc., are all down. This, of course, depreciates the value of the portfolio of many investors. So investors are usually one of the first people to be hit by a recession when it happens because they lose a significant portion of their wealth when the value of their investments declines, especially if they sell off those investments. Second, the working-class. Working-class people are perhaps the most hit by a recession because most of them have one source of income, which is their earned income. During a recession, businesses lay off people en masse. Thus, those who have been laid off have no revenue to sustain themselves. The only way to sustain themselves is by living off their savings in the meantime until they find another job or until the economy recovers. Third, an economic recession shrinks the middle-class.
An economic recession can present a lot of opportunities for those who are financially literate and sophisticated. During a recession, many investors panic and decide to sell their investments, which then becomes a capital loss. Many investors do so to cut their losses. For value investors such as Warren Buffett and Charlie Munger, a recession presents the opportunity to buy more assets at a discount price. This situation presents an opportunity to retail investors to buy shares of companies below market value, something that they wouldn’t be able to afford if the stock prices of these companies were still high. For example, in 2022, the stock prices of many tech companies such as Amazon and Tesla declined substantially after splitting their stocks. Prior to 2022, one share of Amazon stock cost $3,000 and one share of Tesla stock cost about $1,000. Unless one believed in these companies from their founding days and invested that early, it would be virtually impossible for a regular person to spend that kind of money on one single share of a company’s stock. Only professional investors could afford investing in these companies at such high valuations. Today, the stock split of these companies following the rise of interest rates made it affordable for retail investors to invest in these tech companies.
An economic recession also presents a great opportunity for prospective homebuyers. As was aforementioned, during an economic recession, the price of housing drops, which makes houses much more affordable. Homeowners who panic during the recession will likely sell their house due to a decline in the value of the equity they had in their home. Most homeowners who sell their homes during recessionary times are middle-class and working-class people. They usually have only one source of income, which is their salary, and when they lose their job, they have no choice but to sell their house at whatever price they can in order to make ends meet. Those who are financially literate capitalize on these recessionary times to maximize the purchase of assets at discount prices in order to increase their wealth once the economy recovers.
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