A Rock and a Hard Place: The Difference Between A Recession and a Depression

Key takeaways

• A recession is a shorter and sharper economic downturn, whereas a depression lasts for years and is a severe GDP contraction
• It’s still unclear whether the U.S. is headed for a recession, with the Fed hinting at interest rate pauses in June
• The best approach for your portfolio is bulking up on recession-proof stocks and diversifying

Recessions and depressions: They’re not exactly fun times for anyone, but there are some major differences between the two economic situations. It can be hard to tell whether we’re headed for a recession or not, but here’s an explainer on what the difference between the two is and how you can protect your portfolio from an economic downturn.

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What’s the difference between a recession and a depression?

Both are pretty bad financial situations for a country to be in, and there’s no official criteria for determining either of them, but there are some key differences between the two that can help economists and investors understand the scenarios.

A recession usually lasts for a few months as it’s defined as when a country’s GDP shrinks by two consecutive quarters in a row. There will be some unemployment, which we’ve seen in the last few months with mass layoffs, as well as typically being confined to one country.

Don’t get us wrong: recessions can be bad. None of us want to remember the global financial shock of the Great Recession of 2008 as the U.S. subprime mortgage market collapsed. But a financial depression is even worse than this scenario.

A depression, which doesn’t come around very often, usually lasts for years and sees the GDP plummet by 10% or more. This often results in mass unemployment and can quickly affect other countries that may be trading with them. The most famous example is the 1929 Great Depression, which lasted until 1933 (ouch).

How to invest in a recession

That being said, all the talk from the Fed of a potential recession has indicated they’re not expecting a deep one. The latest chatter is that the Fed will look to pause a rate rise in June and see if the economic data catches up enough to show monetary tightening is working.

With that in mind, the best way to invest in a recession is a two-pronged approach: going for ‘recession-proof’ stocks and diversifying. Recession-proof stocks include companies that are slow and steady regardless of the economy’s health, like utilities and consumer goods. Some classic company examples are Walmart, T-Mobile and Pfizer to name a few.

As for diversification, it’s good advice at any time of the year but especially during a recession. Minimizing your exposure to one particular industry, country or asset means you’re not just putting all your eggs in one basket. Instead, if companies or even a whole sector starts to collapse, you can sit back and relax because you’ve got holdings in other industries.

The bottom line

Whether or not a recession is coming is anyone’s guess, though the financial picture isn’t looking too hot across the globe. But the difference between a recession and a depression is pretty big, and it’s not looking like we’re heading to anything like 1929 again anytime soon.

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