Another day of reckoning

With economic history pointing to a recession in 2024, investors should go on the defensive

- MAX RIAZ

In August, I suggested it was time for investors to go underweight growth in their portfolios, as growth markets (that is, equities) would start to struggle in a slowing economy. I am now doubling down on my call to maintain the defensive posture as, from my perspective, in 2024 we will likely experience an economic recession in Australia.

I draw a lot of inspiration from economic history. So, let's revisit an important lesson about the direct link between rising interest rates and recessions. This link is unbroken, just as night follows day. While I am drawing on US interest rate history, I believe the conclusions also apply to the Australian economy.

There were 10 recessions between 1950 and 2020 and each was preceded by a campaign of interest rate increases. To delve deeper into this thesis, let's take a closer look at the past two.

How the GFC unfolded

First, the global recession in 2007-08 was preceded by an aggressive rate-hiking campaign by the US Federal Reserve. The official cash rate rose from 1% in 2004 to 5.5% in 2006, and then interest rates were left at that tight setting for another 12 months until late 2007.