Everyone’s talking about recession risk—here’s what investors need to know

Another important lesson investors can learn from history is that, as soon as the economic skies clear, markets tend to rebound quickly and powerfully. Historically, after markets have bottomed out, average returns over the following 3, 6, and 12 months have been approximately 19%, 26%, and 41%, respectively. Once the storm passes, markets don't merely recover—they flourish.

Yet not all recessions are created equal. The worst, like the 2008 financial crisis, inflicted serious economic scars, wiping out nearly 60% of stock market value. In contrast, milder recessions, like those following wars or brief supply shocks, proved relatively shallow and short-lived.

What makes a recession severe? Typically, it's driven by deeper issues like financial instability or widespread economic imbalances—exactly the kind of risks elevated by prolonged trade tensions and uncertainty.

Could "stagflation" rear its ugly head?

There's another worrying possibility: "stagflation"—an economic worst-case scenario combining recession—or economic stagnation—with rising inflation. Tariffs can cause precisely this: slowing growth (by dampening demand) while simultaneously making everyday goods more expensive (by raising costs). If inflation runs hot during a recession, central banks face a no-win scenario: fight inflation by raising rates, worsening the recession—or boost growth, risking runaway inflation.

This happened in the 1970s, and the echoes today are troublingly similar. Investors should keep this risk firmly on their radar.

Are we headed for a mild shower or a major storm?

How severe could a recession triggered by today's trade war be? Historically speaking, tariff-driven recessions tend to be more severe, as global trade is so integral to modern economies. Trump's "Liberation Day" tariffs risk pushing an already vulnerable global economy into serious trouble.

While we don't yet know exactly how deep this downturn could become, economists' worries have intensified significantly. It’s not just fearmongering: there's genuine potential for this to be one of the harsher recessions in recent decades if current tensions escalate further.

"We're sailing into uncertain waters—tariffs aren’t just a wave, they're potentially a tsunami for global growth."

So, what does all this mean for investors?

As an investor, it's natural to feel nervous right now. But history clearly shows us that panic is the worst possible response. Smart investing in uncertain times isn't about avoiding storms entirely—it’s about navigating them skillfully.

Here's what investors should consider right now:

• Stay calm and avoid panic selling: Historically, those who hold their nerve through market volatility have come out stronger.
• Diversify your investments: Spread your risk across different sectors, regions, and asset classes. Avoid heavy concentration in vulnerable areas.
• Build or maintain an emergency fund: Have cash on hand so you won’t be forced to sell during downturns.
• Consider gradual investing: Buying high-quality stocks at lower prices during market dips can pay off significantly when recovery arrives.
• Prioritise quality and stability: Defensive sectors like healthcare, consumer staples, and strong dividend-payers typically perform better during recessions.

Remember that markets historically have reward patience, not panic. So your strongest defence in a downturn is discipline.

A silver lining amidst the clouds

Recessions, no matter how unsettling, are temporary storms. The historical record shows they invariably end, often quicker than expected, giving way to new periods of sustained economic growth. Remember this reassuring fact: recessions typically last about 10 months, but recoveries and expansions often last for years. Markets don't just recover—they flourish.

Storms pass, but disciplined investors endure

Yes, the economic skies look gloomy right now. And I wish I could say things won’t get worse, or reassure you that we’re already through the worst. But unfortunately, history often tells a different story: things can indeed get worse before they get better. Markets could fall further, volatility might intensify, and investor confidence might take yet another hit.

However—and this is just as important—history also tells us it will get better. Every recession we’ve experienced has eventually given way to recovery. Every market crash, in time, has been followed by fresh new highs. Remember that.

Trump's tariffs and the resulting trade wars have placed the global economy on shaky ground. But keep perspective: recessions, though painful, are inevitable parts of economic life. They clear away excesses and lay crucial groundwork for future growth. Think of it like a storm shaking the trees, stripping away weaker branches but leaving stronger ones ready to thrive when the sun returns. Investors who weather this uncertainty patiently and strategically—rather than reactively—will ultimately reap the rewards.

Keep calm, remain disciplined, and stay true to your long-term investment principles. Storms pass—but disciplined investing endures, thriving long after the clouds have cleared.