What’s a Recession Anyway?

Unfortunately, there has been a lot of talk about a looming recession sometime in 2022, and the market has certainly priced some (if not all) of that in so far this year. A recent Wall Street Journal survey of economists says there’s a 44% chance of a recession. But, what exactly is a recession? And, how do we know if we are in a recession?

 

While there are some differing opinions on the causes of a recession, most people look at 2 consecutive quarters of a decline in GDP (Gross Domestic Product) as a recession indicator. The National Bureau of Economic Research (NBER) says, “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.”

 

While recessions are a negative indicator of economic health, they are a normal part of the business cycle. Economies by definition can never be in a constant state of expansion. According to Kiplinger, the average length of a recession (since World War II) is just over 10 months, and there has been an average of about 5 years between recessions.

In terms of investment timing and market performance, we usually don’t know about a recession until we are in one (or just past it). Again, from Kiplinger, “In the most recent case, the NBER called the end of the Pandemic Recession on July 19, 2021, or 15 months after it ended. Meanwhile, the S&P 500 gained 50% from April 30, 2020 to July 14, 2021.”

 

From Horizon Investments, “Making major investment moves, such as jumping in and out of the market, based on the possibility of a recession—and even the high likelihood of a recession happening—could very well be a recipe for disappointment. That’s because, as the chart below reveals:

  • The average length of the 12 recessions since World War II was just over 10 months.
  • Stock prices peaked roughly 6 months prior to the actual start of the recessions, on average.
  • On average, stock prices bottomed out around 4.5 months before those recessions ended.

The takeaway: By the time we actually know we’re in a recession, stock prices have likely already fallen—and by the time we know the economy is back on track, stock prices have almost certainly risen.”

I recently attempted to forget about potential recessions and other negative indicators while on vacation with my family last week. We did a lot of fun things, but probably my favorite part was enjoying some steamed crabs on the back deck. And, we got home in time to enjoy some amazing fireworks with family and friends. We here at Meridian hope you and your loved ones had a happy 4th of July!

 

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What’s a Recession Anyway?
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One thought on “What’s a Recession Anyway?

  • July 5, 2022 at 7:26 pm
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    Excellent blog. I don’t know if these are related questions, but here are a couple. One, does the stock market still look about six months ahead, and does the market reflect that? Two, I’ve read somewhere that a stock market correction usually returns to its pre-correction level in about 2 years, and a bear market usually returns to its pre-bear level in about 3,2 years. These numbers come from about 90 years of data. Do they look reasonable?

    Thanks, and keep up the informative blogs.

    Reply

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