In a few months we have gone from expectations of sustained growth to the fear of a revival of the Seventies with inflation out of control, and now in an increase of the drama to the risk of recession.
However, if you look at the official forecasts, in 2023 the growth of Western economies should return close to the trend and inflation under control. A situation that should make us skeptical of macroeconomic forecasts.
“Recession” and “bear market” are clear but indefinable concepts. We are able to classify them as such only afterward.
Recession
A recession, in the economy, is a macroeconomic condition characterized by levels of production activity (GDP) lower than those which could be obtained using all the productive factors available completely and efficiently, as opposed to the concept of economic growth. Consequences of the recession are therefore an increase in unemployment, a slowdown in productivity, a drop in consumption, and a fall in access to credit.
Symptoms of the phases of recession can be the decrease in the growth rate of production, the increase in unemployment, the decrease in the interest rate following the reduction in the demand for credit by companies, the slowdown in the rate of inflation caused by the decrease of consumer demand for goods and services. In some cases, recession can be associated with rising prices (inflation), and this phenomenon is also known as stagflation.
In the event of a recession, an increase in interest rates produces a further decrease in production, with a consequent increase in unemployment and consumer prices, a decrease in consumer credit and all of this translates into a decrease in the demand for goods and services by consumers pushing the recession into a full-blown depression (such as the Great Depression of 1873 and the Great Depression of 1929).
Economists have tried to explain the periodic occurrence of crises in capitalism. Some well-known theories are:
- The theory of the tendency of the rate of profit to fall, according to which the rate of profit – the ratio of the profit to the amount of invested capital – decreases over time.
- The theory of underconsumption, according to which recessions and stagnation arise from inadequate consumer demand, relative to the amount produced
Find out how to invest during a recession.
Bear market
If the market has a drop of 20% from the previous (record) peak, in financial jargon it means “entering” a bear market; this is a very important level because for the world of investors it marks the dividing line between a physiological correction (10%) – and sometimes in some ways even healthy – and entry into the so-called bear market, the opposite of the bull. Obviously, it is not a confirmation because the market can have sudden recoveries (rally to the upside) and invalidate the whole.
The bull and the bear have always been symbols of the good performance (the bull: bull) or the bad performance (the bear: bear) of equities. The origin of the English term derives from the typical movements of the two animals: “Bull Market” means that the market goes up and therefore is compared to the gored of a bull (which is, in fact, a movement from the bottom up), while “Bear Market” means that the market goes down and therefore resembles the paw of a bear (from top to bottom).