What does a reduced risk of a recession mean for investors?

The UK economy grew last month, so is a recession off the table? Stephen Wright says that as an investor, he should treat the latest news with caution.

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News of economic growth is pushing the FTSE 100 close to all-time highs this morning. UK economic activity increased in November instead of declining as forecast, making a recession less likely.

Despite the ongoing problem of inflation, the prospect of economic growth might seem like good news for UK investors. But I have three reasons for not getting carried away by today’s news.

Focus

The first reason I’m treating the news with caution is that the boost to the UK economy seems quite specific. A good amount of the boost came from the World Cup.

Despite a(nother) quarter-final exit, football fans headed to pubs and bars to watch matches. This boosted the economy, but I think that its effect is going to be limited in two important ways.

First, it seems like a one-off event, rather than something more durable. With the World Cup now over, I’m not convinced that spending is likely to continue.

Second, higher spending seems to be focused on pubs and bars. This doesn’t give me a reason for optimism about higher corporate earnings across the board.

Economic growth

Even before today’s news, a recession was never a certainty. One was likely and I think it remains that way, but there were reasons for thinking it might have been avoided.

According to research from Morgan Stanley, UK consumers have been sat on savings deposits of over £200bn. And monthly inflows remain higher than pre-pandemic levels.

This indicates that UK consumers have money to spend. So a boost to the economy from increased spending was always a possibility.

Energy prices have also been falling as winter weather has mainly been warmer than expected. This has helped limit the effect of anticipated increases to energy bills.

As such, I never thought that a recession was a dead cert. Today’s news doesn’t change much for me because I already thought there was a chance of avoiding it.

Investing

The last reason that I’m not getting overexcited by today’s news is that macroeconomic news plays a limited role in my thinking. As an investor, I look to buy shares and hold them for a long time. 

When I buy stock in a business, I look to own it for 10, 20, or 30 years. That means it’s likely I’ll own my investment during a recession at some point.

Instead of working out which stocks are going to do well in specific situations, I concentrate on the long term. I think about which companies will do well over the time through various economic cycles.

If the UK shares I own generate more profit this year due to a better macroeconomic outlook, that’s great. But as an investor, it’s only one part of the bigger picture.

Overall, I’m just looking to buy shares in strong companies at decent prices. If avoiding a recession means higher earnings, that’s good for me. But I’ll never take a short-term view.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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