Recently concerns have arisen about a possible global recession, resulting from weakening economic indicators in the United States and China, declines in the German and United Kingdom economy, and an inverted bond yield curve. The latter is seen as an indication of impending recession, as it indicates investors are moving towards safer investments.
Of course, there has been anxiety, as we all remember the 2008/9 great Recession, caused by a financial crisis, and the effect on savings, investments, and global economies. There is no doubt that today’s global markets are even more connected than before, and when there are health or economic concerns in any part of the world it is most times just a matter of when it will affect countries thousands of miles away.
Economies naturally go through cycles, as once buoyant asset prices always become depressed as the nature of markets is that demand always naturally rises to a point where it is irrational.
For example, if asset prices are depressed and sophisticated investors see opportunities, they will purchase shares. What happens is that more investors will come to the market and purchase shares, as renewed demand drives more interest, and sends prices even higher, and during the upward trend you may have some people selling to lock in returns, but in general there is an upward trend. Then what happens is that the more unsophisticated (retail) investor sees the movement in prices and starts demanding shares themselves. By this time the major movements upwards have happened and the unsophisticated investor will get some returns, but not what was seen before, and inevitably this will push prices beyond where there is any perceived value.
By this time, sophisticated investors would have locked in their returns by selling or hedging against price reductions. As the larger sophisticated investor starts to sell, or pull back on purchases, prices start to come down. As an example, when investors leave the stock market and go towards safer investments, hence inverting the bond yield curve.
The result of this is an economic slowdown, which many times leads to a recession, as retailers lose value and hence lower income. They then demand fewer goods and services and manufacturers cut production leading to a decline in economic activity.
So recessions, like death and taxes, are inevitable.