Is a recession bad for the stock market?

Today I was reminded about investor psychology and the old saying that if you follow the masses, you’re probably going in the wrong direction. Everyone seems to be talking about a world recession in 2023, with some arguing that the US is already in recession and that Europe and the rest of the world will follow.

But is this really bad for the stock market? 

The answer may surprise you because it is contrary to what the masses are spruiking, particularly as recessions are generally good for the stock market.

A recession is defined as two negative quarters of GDP. Australia experienced a technical recession in the years 2000, 2006, 2018 and 2020. Each time the market had a short dip before rising strongly. The recession in 2020 was a little different – it was event-driven and due to the COVID-19 pandemic, which saw the world quickly shut down while the other recessions simply slowed the economy.

The question right now is if Australia does go into a recession in 2023, will the stock market dip again?

I believe this is unlikely, as the market is indicating that it will rise in 2023. The COVID recession was a little over two years ago, and unlike what occurred after previous recessions, our market has not been overly bullish.

Given what has unfolded in the last two years, including the increasing inflation and rising interest rates, I believe the market has already factored in a recession. 

In essence, if everyone is thinking the market will fall and has already factored in the worst, then moving forward, the market must rise.

The contrarian view that Buffett talks about rings true right now because if everyone is afraid of the stock market, this spells opportunity for those who remain unemotional and patient.      

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au