Recessions have been at the epicenter of the biggest crashes in history so it’s understandable that investors are anxiously anticipating its arrival. Honestly, we could be in a recession right now with little statistical evidence to properly formalize its existence. For starters, the definition of a recession itself is difficult to pin down. Some market pundits claim it to be two consecutive negative GDP prints. Though incorrect, it is widely used as a placeholder. The technical definition is as follows:
The National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity that is spread across the economy and that lasts more than a few months. The committee’s view is that while each of the three criteria (depth, diffusion, and duration) needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another.
Here is a look at every recession since WWII along with S&P 500 returns in the 6 months leading up to the recession, during the actual recession itself and then one, three and five years from the end of the recession:
The stock market and the economy are not always in sync with one another. Generally, the stock market is forward looking, but sometimes it struggles to respond to the prevailing economic backdrop. Fortunately for investors, the stock market tends to do very well after a recession is over.
The S&P 500 is currently down nearly 16% or so from all-time highs as it grapples with the possibility that inflation may be peaking which could alter the trajectory for the Fed. The stock market could certainly fall further from here, but it won’t be easy to use the economy as some sort of signal for stock market performance. Inevitably, like day follows night, the US economy is always marching towards a recession. We will remain invested throughout as the rewards of that approach far outweigh the fools errand of trying to accurately time the precise entry and exit points along the way.
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