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Recession vs. Market Crash: Which Is Worse for Your investments?

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When markets are crashing or the economy’s growth is slowing, naturally these topics make up all the major headlines and can help build up the uncertainty among investors.

Nobody likes the uncertainty of poor economic times, especially when the consequences can be absolutely devastating.

But what exactly is a market crash or a recession, what causes them and how will they affect your finances?

Recessions

Recessions happen when the economy stops growing and begins to contract. Technically, economists say that recessions begin once an economy has sustained two consecutive quarters of negative GDP growth, whether the economy contracts by 0.1% or 5%.

Recessions can be caused by a number of factors, and are actually healthy and normal in economic cycles. Each recession also has a different impact on the economy, and depending how the recession was caused, different ways of being handled.

For example, most recently in Canada, the economy slipped into a minor recession back in 2015, which was caused by the major decrease in oil prices, having a large enough effect that the entire country’s GDP actually decreased for a couple quarters.

This was technically a recession, even though most parts of Canada showed little to no impact on their economic output.

That recession was solved by the Bank of Canada reducing interest rates to lower the Loonie’s value, which helped to increase exports and brought the country out of recession.

Recessions will impact your businesses in the short term and can be devastating to risky businesses or companies lacking strong operations or a competitive advantage.

If you own top stocks that you are confident in, however, then you have nothing to worry about.

Market crash

A market crash, although different from a recession, usually goes hand in hand with a recession.

Market crashes strictly occur in the stock market, and although they are caused by fear regarding something in the economy, technically have nothing to do with economics.

The stock market is naturally forward looking as investors try and predict what’s coming next.

Often times the two will feed off each other, as negative economic numbers can cause the stock market to sell-off, and markets selling off and poor liquidity in credit markets only hurt the economy.

It can also cause consumers to lose confidence, thereby slowing the velocity of money and hurting economic output.

This week the market has been selling off as the developments to Coronavirus seem to be getting worse. A lot of experts now believe it could have a major effect on the world economy, which is what has created this major sell-off in stocks

It should be noted however, that these are just estimates and the impact on economies is still highly unpredictable. That said, these are strong estimates based on economists and health professionals making their best predictions, so it’s the best guess we can go on for now.

How it affects your investments

If you are concerned your portfolio may be at risk if the sell-off continues, you’ll want to review your portfolio and make sure the stocks you own are long-term investments that you are committed to hold for years.

These holdings should be companies that are the best-of-the-best and business with defensive operations, like a leading utility such as Fortis Inc.

Utilities are great companies to hold through recessions because their assets and operations are extremely resilient and should see only a small effect to the bottom line.

While all companies will be affected one way or another if a global recession does ensue, most customers — whether residents or businesses —  will still need power, water and gas, which is why utilities are such reliable companies to own through recessions.

In addition, Fortis also pays an attractive 3.4% dividend, returning cash to shareholders that they can use to invest in other high-quality companies trading at discounts.

Bottom line

Market crashes and recessions will only be bad for your investments if you panic sell your high-quality companies, or hold speculative investments too long, instead of using the opportunity to fill your portfolio with top stocks like Fortis, at an attractive discount.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.

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