Is a recession coming in 2023? 3 things to know

Here's how to prepare for a potential recession.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

This year has been tough for everyone, with stock prices plummeting and inflation making it harder to pay the bills. But many people worry that we haven't seen the worst of it and that a recession could be looming.

While the US economy shrank in the first half of the year, we're not officially in a recession just yet. The National Bureau of Economic Research is responsible for making that call and its economists have not declared a recession so far.

But that could change in 2023. Is a recession on the horizon? And what can you do to prepare? Here's what you need to know.

1. Recessions can be tough to predict

Nobody -- even the experts -- can predict exactly how the economy will perform. This is especially true when the economy is giving somewhat mixed signals.

Plummeting real estate prices, for example, could suggest that a recession is more likely. However, one key hallmark of a recession is high unemployment and with the job market stronger than ever -- and many industries still experiencing a labor shortage -- some economists are hesitant to declare a recession just yet.

Some experts believe that the Fed's interest rate policies could affect the potential of a recession. The Fed has already hiked interest rates several times this year in an effort to slow inflation, but higher interest rates are also more likely to slow the economy and lead to a recession.

The good news is that if we do face a recession, most experts believe it will be mild. In fact, around 70% of economists believe it's unlikely we'll see a sharp rise in unemployment over the next year, according to a poll from Reuters.

2. It shouldn't change your investing strategy

Stock market downturns and recessions often go hand-in-hand, and many investors are concerned about how a recession could affect their portfolios. However, regardless of what happens with the economy, it shouldn't change your investing mindset.

Investing in the stock market is a long-term strategy, and short-term ups and downs shouldn't affect your decisions. Even if stock prices continue to fall in the coming months, the best way to keep your money safe is to hold your investments until the market recovers.

Trying to time the market and sell your stocks at just the right moment is incredibly risky, and you could easily lose more than you gain. But if you simply hold your stocks for the long term, your investments should eventually rebound and you won't have lost anything.

3. There are ways to protect your portfolio -- even in a recession

Whether we ultimately experience a recession or not, there are ways to keep your money as safe as possible. Holding your investments for the long term is the best way to protect your investments, but there are a few other factors to consider, too.

  • Avoid investing any money you might need in the foreseeable future: If stock prices fall sharply and then you realize you need to withdraw your savings, you could end up selling your investments at a steep loss. If you're investing for certain goals -- like saving for a house -- make sure you're prepared to leave your money in the market for at least a few years before you invest.
  • Beef up your emergency fund, if you haven't done so already: If you don't have any emergency savings and you lose your job or face an unexpected expense, you could be forced to tap your investments -- and lock in those losses.
  • Invest in high-quality companies: Market downturns can be a more affordable time to buy because many stocks are on sale right now. However, not all companies will be able to recover from a recession. Before you buy, do your research to ensure you're only investing in strong companies with the potential for long-term growth.

Some experts believe a recession is becoming more likely, but nobody knows for certain what will happen. By investing in strong companies and holding those stocks for the long term, though, it's far more likely you'll make it through any recession.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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