World's fourth largest economy enters recession. Is a crash coming soon?

And proud Indians aren't tired of flashing it to their fellow citizens as well as the rest of the world. This chart says India has a zero percent chance of a recession in 2023.

In other words, India is the only major economy in the world that won't face a recession in 2023.

Guess what, something happened last week to make you trust this chart even more. This chart had given Germany a 60% chance of a recession in 2023.

Well, the people behind the chart have reason to rejoice. They said Germany, Europe's largest and the world's fourth largest economy, had a strong possibility of recession this year.

Well, Germany has officially entered a recession.

Germany's gross domestic product (GDP) fell 0.3% for the March quarter. This follows a 0.5% contraction in the last 3 months of 2022. Two consecutive quarters of contraction is what commonly defines a recession. Germany has crossed this threshold.

Higher energy price is one of the key reasons behind Germany's economic struggles. Although a mild winter and easing supply chain problems did help, they could not prevent a recession.

Now, Germany has set off alarm bells across the rest of the world. Everyone's thinking about the next domino that could topple and add to the woes.

More importantly, people are worried whether this could crash the stock markets.

To be honest, no one knows for sure.

If historical evidence is anything to go by, I don't think investors need to worry too much about recessions. Stock markets have managed themselves quite well in the face of economic contractions.

A piece on the Fidelity website provides some nice information.

It says that the S&P 500 i.e. the US benchmark index, went up by 1% on an average during all recession periods since 1945. So, the stock market actually went up on average during periods of economic contraction.

Isn't this illogical and counterintuitive? If the economy goes down, stock markets should also go down, simple.

Well, the stock markets do follow the economy. But they happen to be a leading indicator. Put differently, they top out before the start of the recession. And they also bottom out before the recession ends.

This leads to a situation where stock markets give positive returns even during a recession.

Of course, this is not always true. As per the same Fidelity piece, there have also been occasions where the stock market has gone down during a recession.

In fact, during the last four recessions since 1990, the S&P 500 has declined 8.8% on average. This is certainly a performance worse than the pre-1990 period.

However, it's not something that will keep you up at night. An 8.8% crash is pretty much par for the course in the stock market.

Yes, it's true that I'm talking averages here. And there have been recessions where the US stock market has declined more than 8.8%.

During the 2008 crash, the US economy was in recession between December 2007 and June 2009. The US stock market went down a huge 36% during that period. So, the stock market did crash significantly during this recession.

Another big decline was the recession between November 1973 and March 1975. Here, the markets corrected by close to 20% (Source: Invesco).

Therefore, it's possible that the upcoming recession in the US and other parts of the world may lead to a big stock market crash.

However, there's also a possibility that it may not. Hence, as an individual investor, it may get really confusing as to what would be the right strategy to follow.

Should one move out of stocks and get into the safety of bonds and fixed deposits, or should one stay put and not do anything, even if there's a risk of our portfolio getting cut in half?

To be honest, such analysis isn't very meaningful for an Indian investor.

There is very little chance the Indian economy could enters the recessionary danger zone in 2023. Yes, our growth may slow down. However, it looks unlikely that our economy contracts in 2023.

Having said that, our stock market isn't likely to stay insulated from the developments across the world, especially the US stock market. And if the latter were to cave in, there will be tremors felt here as well.

We believe the best option during such times is to maintain a long term perspective.

You see, the long term India growth story is still intact and fundamentally strong Indian companies would certainly be creating new profit records 10 years from now.

Therefore, the idea should be to stay invested in such stocks even if they are likely to go down in the near term. Any significant correction in their stock prices shouldn't lead to panic and anxiety. Instead, should be seen as an opportunity to buy more of their shares.

Yes, you should be wary of investing in stocks in weak competitive positions and having weak fundamentals. But you don't have to worry about companies with strong fundamentals.

Market corrections and crashes are big opportunities to enter such stocks at valuations that tilt the risk-reward equation firmly in your favour, from a long-term perspective.

And you should grab such opportunities with both hands whenever they are presented to you. After all, it's during such times that the biggest fortunes are made in the stock market.

So, be greedy when others are turning fearful and put yourself in the driver's seat of the long-term India growth story.

Happy Investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com