What could a recession mean for your wealth? Here’s what you need to know

25/11/2022

Data collated by the Resolution Foundation suggests that the UK is on course for its fastest return to recession since the mid-1970s. That’s according to an article by Reuters, which revealed the UK’s economic output shrank by 0.2% in Q3 of 2022 – something that may signal the start of a lengthy recession.

With this in mind, you may be wondering what this means for your investments and wider wealth? As clients of Douglas White, you have peace of mind that we’re always on hand to explain what’s happening with the UK and global economy, how it might affect your investments, and how best to deal with it.

While 2022 has seen plenty of uncertainty and doom-laden headlines in the media about the UK’s economy and political situation, there are some positives that you might want to consider. Read on to discover what they are.

Covid and the war in Ukraine started 2022’s economic storm

With the aftermath of the Covid pandemic and war in Ukraine, 2022 has seen soaring inflation and skyrocketing interest rates, which has led to an extremely nervous stock market. In September, former chancellor Kwasi Kwarteng announced his “mini-Budget”, which included a swathe of tax cuts designed to stimulate the British economy.

In reality, it fuelled fears and expectations that the UK was heading towards a recession instead, prompting alarmist headlines like the Guardian’s ‘Bank of England warns of longest recession in 100 years as it raises interest rates to 3%’.

Yet headlines like these miss out an important point: since the 1970s, just about every decade in the UK has seen a recession, after which the UK economy recovered. For example, the 2020 recession that was caused by the Covid pandemic was the deepest since records began. 

Yet it lasted just six months, and in March 2022 the Guardian reported that Britain went on to experience one of the fastest rates of growth in the G7 group of nations. While Britain’s economy has slowed since March 2022, it’s still worth remembering that Britain has weathered recessions, high inflation, and surging interest rates before. 

In the 1970s, inflation reached nearly 23%, and in 1990 interest rates soared to 15.4%. Yet interest rates remained at historically low levels from 2009 until 2022 and official figures show that inflation averaged 2.5% from 1989 until 2022. 

Furthermore, the stock market has suffered significant downturns and then recovered. To demonstrate this, you might want to consider the illustration showing the performance of the FTSE 100 between November 1984 and November 2022. 

The index follows the performance of the 100 top companies registered with the London Stock Exchange.

Source: London Stock Exchange

As you can see, despite major downturns along the way, the index has increased significantly during the period. Always remember that past performance is no guarantee of future performance.

One reason for this is that the economy and stock market are not necessarily linked, something we will look at next.

The stock market and global economy is not entwined 

The stock market tends to look at what will happen in the future, while the economy typically looks at what has already happened. For example, inflation shows how much the price of goods and services have increased during the last year, but doesn’t suggest where they might be next year. 

In contrast, the price paid for a stock is based on how well investors expect a business to perform next year and further into the future. To demonstrate how this can result in the stock market performing differently to the economy, you might want to consider the following illustration of the FTSE 100 between January 2008 and January 2018.

Source: London Stock Exchange

As you can see, despite the financial crisis of 2008 that lasted for several years, the index started to recover in 2009. 

Concentrate on your long-term goals 

When the economy looks uncertain and the stock market becomes volatile, it’s important to concentrate on your long-term goals. If you sell your investments during a stock market downturn, you could turn a paper loss into a real one and deprive your money of any future growth potential when the stock market recovers.

One way you could make it easier to concentrate on your long-term goals is to pay less attention to media “noise”. Avoiding alarmist headlines could prevent you from panicking and selling your stocks to limit losses, something you could later regret.

It’s worth remembering that these headlines can feel worse at the time because of recency bias. This is when the anxiety you’re feeling now makes you forget that your money may have survived one or more downturns, which may have been more severe than the current one.

It’s often more useful to remember that, the longer you remain invested, the more likely your money will enjoy growth potential. 

This is highlighted by the2019 Barclays Equity Gilt Study, which tracked the nominal performance of £100 invested in cash, bonds or equities between 1899 and 2019. It found that if you invested for two consecutive years during the period, you had a 69% chance of outperforming cash. If you invested for 10 years, this grew to a 91% chance.

Work with us

At Douglas White, we know that downturns happen with investments. That’s why we create long-term strategies for our clients that take into account falls in value of the stock market as well as economic uncertainty.

This is particularly true when it comes to pensions. If you would like to learn more about how we can help you ensure your pensions provide the lifestyle you want in retirement, read our informative blog.

If you’d like to discuss the current economic climate and your investments, or know anyone who might benefit from working with us, please get in touch at info@douglaswhiteltd.com or call 0151 345 6828 to speak to us today.

Please note

This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change. 

The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.