What is a “Recession”? Here Are the 5 Key Indicators
Wealth Manager, Marcus Anderson, CFP®, CIMA®, AIF®, breaks down the 5 key indicators, definitions, and more.
I want to talk about the word “recession”. A word that can spark fear and anxiety in a lot of people. Unlike, what most people think, which is, “we’re in a recession if two consecutive negative GDP quarters”, or Gross Domestic Product. Turns out that GDP is just one of the 5 different metrics that “The National Bureau of Economic Research”, uses to officially proclaim when the recession starts and ends. Here are the five metrics.
- Decline in Real GDP
- Decline in real income or income after inflation is taken into consideration
- Rise in unemployment
- Stagnation of industrial production and retail sales and finally
- Decline in consumer spending. Therefore, the definition of a recession according to the National Bureau of Economic Research is, “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”
Since World War II, the average length of a recession has been 10 months, the longest was the Great Recession at 18 months and the shortest was during COVID at only 2 months. The average length of a business cycle, peak to peak, has been 69 months or just under 6 years, with the longest expansion period being 130 months, basically 11 years, and the shortest being only 6 months.
So, the length and frequency between recessions vary widely and every downturn has a different reason. What is certain, is that there will eventually be a recession, but the severity and length will vary on the many circumstances, which makes predicting one with any kind of accuracy very difficult do, if not impossible to do.
But this is what we do know. Recessions are much shorter compared to the total expansion period, by a huge margin. Just by using the average recession length, so 10 months, divided by the length of the total business cycle, 69 months, which means the US economy only contracts less than 15% of the time.
Now, most people listening to this video care about the economy, but let’s be honest, you probably care little more about how the stock market reacts to a recession. So here goes…in general, stock markets try to predict the bottom of the business cycle and tries to be ahead of it, in fact, stocks are typically 28% above their trough by the time economy hits the bottom. In fact, 11 out of the last 12 recessions, the S&P500 has bottomed before the recession was over. Stocks usually bottom about 6 months before the economy does and the median bear market lasts about a year. And finally, buying stocks after a 20% decline has typically led to better returns over the following one and three-year periods.
As investors, you should always concentrate and focus on a well-diversified portfolio that aligns with your long-term goals and I would recommend you consult a professional advisor that can help you create and maintain one.
I hope this was helpful and please don’t hesitate to reach out to your Merit Financial Advisor for any help you may need of your portfolio. Have a great rest of your day!
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice servicers must be obtained on your own separate from this educational material.
- When Do Stocks Bottom? – Forbes
- Recession: What Is It and What Causes It – Investopedia
- What is a Recession – Forbes
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
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