Australian consumers and businesses are feeling the weight of 12 interest rate rises in 13 months.
The big question now is whether the Reserve Bank of Australia has done so much damage that the economy will fall into a recession.
In an ominous sign, New Zealand last week met the definition of one.
So if we're in danger of a recession, what should investors in ASX shares do?
Ophir Asset Management co-founders Steven Ng and Andrew Mitchell had some food for thought in a recent investment strategy memo.
Should I sell my shares before the recession strikes?
Using the US as a proxy, Ng and Mitchell thought the chances of a recession in that country are high.
So that begs the question from investors: "Shouldn't I just sell out now and buy back in when it looks like the market is staging what is usually a big recovery on the other side?"
The Ophir team pointed out how problematic this strategy is.
"While superficially this may seem appealing — and believe me if it were possible, we would certainly do it! — it is highly unlikely to be consistently and successfully achievable by an investor," read the Ophir memo.
"Firstly, a recession is not assured."
If the recession never comes, history suggests share markets rocket upward. Had you sold out of your investments, you will have kissed all those gains goodbye.
"That's not something you'd want to miss if you sold out of the market preparing for a recession," said Ng and Mitchell.
"This is particularly relevant now as commentators debate whether we have already seen the last rate hike this business cycle."
The second reason why selling out doesn't work is that knowing when to buy back in is "virtually impossible".
Ng and Mitchell crunched the numbers on stock market recoveries in past recessions, and found the arrival of "the bottom" varies wildly. Sometimes it comes early in the recession, sometimes late, and sometimes in the middle.
"The odds of getting it wrong by trying to market time are high," read the memo.
"So, staying largely invested seems to us to be the most sensible course of action."
Which ASX shares should I have in my portfolio?
Mitchell and Ng's research found that stocks in certain sectors do better during the first few months after a recession has commenced.
"It tends to be the most resilient, less macroeconomically sensitive consumer staples and healthcare sectors that fare the best, holding their ground," they said.
"This makes sense because, while consumer spending pulls back in a recession, they tend to pull back less on things like groceries or medical costs."
But by the 12-month mark, most sectors have recovered to provide positive returns, led by cyclical industries like materials and consumer discretionary.
"Again, this makes sense. Usually by this stage, the recession is over or nearing its end and forward-looking share markets seek out those businesses that will benefit from a recovery in demand which tends to boost commodity prices and discretionary expenditure."
Right now, the Ophir fund has an emphasis on ASX shares of companies whose growth is agnostic to the economic cycle.
"Usually, that is because the company's goods or services are seen as more of a necessity by their customers, or they have unique attributes versus their competitors [that] is allowing it [to] take market share, or both."
The team named a prime example of this as insurance broker AUB Group Ltd (ASX: AUB).
"It operates in an industry that had proved itself resilient to economic contractions in the past as businesses seek to hold on to their policies in a heightened risk environment."
The AUB share price has risen 24% year to date.
