here are five key charts that explain
how markets typically behave
during a recession
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recessions can cause jitters for
investors but for more experienced
market hawks they could also provide
opportunity
so we've picked the graphs and the data
that could help show you how markets
trade the sphere's rise of a global
economic downturn
copper is often seen as the canary in
the coal mine when the global economy is
booming it needs lots of copper-rich
products like cables phone lines and
infrastructure which keeps the price of
copper high
its price soared from 2006 to 2008 as
the world economy enjoyed a big growth
cycle
but when copper's price falls rapidly
it's a potential sign that the economy
has started contracting
during the financial crash copper's
price plummeted
now here's the key economic red flags
start waving when copper falls rapidly
with the price of south korean exports
south korea's economy is one of the most
open in the world and trade accounts for
more than half of its gdp
for investors south korean exports can
indicate the health of global trade so
perhaps it's not surprising that copper
one of the commodities most susceptible
to global growth tracks its direction
put the price of copper and south korean
exports on the same graph and you see
how tightly linked they are
this means that if you're a copper
trader you might want to keep a careful
eye on export momentum in south korea
and it could help traders detect a
potential economic downturn here at
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when global trade starts slowing
activity in the service sector which
means things like leisure finance and
retail tends to drop
change in the yearly us service sector
activity is represented by this graph
the not so easily named ism
non-manufacturing pmi it does badly
during recessions and picks up in good
times
so far so obvious but we've identified
another index that mirrors and at times
predicts when and where it's going to
move
it's the s p 500 or u s 500 an index of
the 500 biggest companies in america and
in this case we're measuring one year
rolling returns
let's put the data together as you can
see when the us 500 fell from highs in
2010 and 2021 the ism did the same
shortly after
there's also a key figure that might
tell us when a recession has reached the
floor
the moment of maximum pessimism arrived
in 2009 and 2020 when the us ism service
index dropped 12 points from the
previous year
fiscal and monetary stimulus came soon
after which can lead to a stock market
recovery
and as you can see after the fall the us
500 rebounded
i really like this car
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consumer staples are things we really
need like food drink and cleaning goods
while consumer discretionaries are
things we want but don't really need
like cars or jewelry
it's the stuff you'll probably only buy
with a healthy bank balance
the ratio of staples against
discretionary goods tends to rise when
financial waters get choppy
you can see how far it rose before and
during the 2008 financial crash
and that's because investors are
factoring in rising unemployment
they're anticipating that people will
have less money in their pockets to
spend on non-essential items
let's put the u.s unemployment rate on
the same graph
just as the
consumer-to-discretionary sector ratio
rose in 2008 u.s unemployment started
climbing
but things were a little different
during the covert shock of 2020 while
unemployment soared the consumer ratio
didn't shoot up and that's because
government stepped in with big stimulus
packages so there wasn't as big a hit on
personal budgets
however we can see in 2022 that the
ratio has started to rise once again
when staples start outperforming the
discretionary sector it's a sign that
consumer confidence could be about to
fall
which could potentially lead to a
recession
buying gold is less dangerous he feels
safer with his savings in good
old-fashioned gold
when economic times get tough investors
have historically flocked to gold
let's take a look at the relationship
between the respective prices of silver
and gold
this is known as the silver to gold
ratio which describes how many ounces of
gold can be bought with one ounce of
silver
this ratio can fall at the beginning of
recessions when anxious investors seek
out havens like gold
it happened during the pandemic of 2020
and in 2009 during the financial crash
historically the silver to gold ratio
has been related to a pair of seemingly
unrelated currencies the australian
dollar and the swiss franc
the australian economy is heavily
exposed to commodities and is highly
reactive to global growth
in contrast the swiss franc like gold is
a safe haven and reflects the soundness
of the swiss financial system
so these two ratios are strong
indicators of the market's willingness
to take risks
the pair fell sharply during the
financial crash
but they also fell steadily between 2013
and 2020
there was low inflation
non-exceptional growth and no commodity
boom and their drop was then accelerated
by the kovichok
so when the australian swiss pair and
the silver to gold ratio fall it shows
investors really aren't in the mood to
take financial risks
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when the price of oil starts to rise the
world sits up and takes notice
rising oil prices mean gasoline food and
transportation all become expensive
and that causes investors expectations
about future inflation to rise
market expectations for future inflation
in the us are indicated by the so-called
u.s break-even rate
as you can see the price of oil and the
10-year break-even rate are closely
aligned
but oil hates recession once a downturn
hits or when economic fears start
spreading through the markets inflation
expectations generally collapse and oil
prices follow suit
but the price of oil and the break-even
rate fell sharply in 2008 and the 2020
covet 19 crisis
oil traders might want to keep a close
eye on the break-even rate it could be a
crucial barometer of the market's
expectations of a global slowdown which
could benefit traders looking to take
advantage of falling oil prices
each recession is distinct which means
the markets behave a little differently
during each downturn in 2022 the world
is continuing with covert disrupted
supply chains and a war between russia
and ukraine
our analysis provides indications only
and of course further due diligence
should be undertaken before trading you
can read all our market analysis by
visiting the link for capital.com in the
description
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