If you have paid any attention to the media these last few months, there’s an inevitable event headed our way that they say could be detrimental. Everyone is happy to give their opinion and predictions about it and since so many people say it is coming, it must be true. That nasty little word is: recession. A recession has threatened to overtake our economy for a long time, probably even before the pandemic. I think we must figure out what exactly a recession is and how that affects our lives – especially our investment portfolios.
When we look at the textbook definition over the years, recession is often defined as two consecutive quarters of negative GDP (Gross Domestic Product). But it has been changed by the National Bureau of Economic Research (NBER) to include other factors such as employment, real income, industrial production and wholesale/retail sales. The NBER is the only group that can declare whether we are in or had a recession. If we look at the old way of determining whether our economy is in recession, GDP for Q1 was -1.6% and it seems likely that in a few weeks, we will probably see a negative GDP for Q2, as well.
Recessions can be scary because of all their effects on American businesses: slowing production, expensive borrowing, lower margins, layoffs, less in savings. Most people who have lived through a recession or two have been negatively affected or know someone who has been impacted by an economic slowdown leading into a recession. Recessions are a very normal part of a business cycle, but they also vary greatly in severity and duration. The most recent was also the shortest one recorded. In February 2020, the economy stopped expanding and entered a recession, but by April 2020 that recession was already declared to be over. The longest recession in recorded history was the Great Depression, which lasted just under four years.
Many recessions are not actually declared until they are over and the business cycle has begun to move to the expansion phase. Where does the stock market fall in predicting a recession? We consider it a leading indicator. If we are in a recession right now, the stock market started pricing in the recession this past January. Oftentimes, the stock market prices into today what the news reports six months from now. The market is unsure as to what is going to happen to the entire economy when the Fed continues its course of raising rates to slow inflation and in turn, slows down the economy to mitigate the effects of inflation, but often starts selling off in advance of mainstream media getting the information. As the Federal Reserve is raising rates, the long-term effects of these increases could likely be felt for the next few years, which is why we are hearing more and more saying that a recession is more than likely to happen in 2023.
The Fed is attempting to do something that has rarely been successfully achieved. The biggest variable that we’re still unsure of how it will affect us going forward is the massive stimulus package that was put into the economy over the past few years. Will this stimulus push us into many years of growth or was it the main driver of the inflation we are currently trying to control? What we can say for certain is that there could likely be a recession sometime in the future, because they inevitably occur after any economic expansion.
As the old adage goes, “we don’t know what we don’t know.” When it comes to the economy, there are just far too many variables in play. What we do know is that tough markets don’t last, but tough investors do.
