Well, we have officially entered the unofficial recession territory. I figured I should share a few thoughts on that weird sentence I just wrote.
- First off, the unofficial definition of being in a recession is two straight quarters of negative GDP. Technically we have hit this “unofficial” definition as we just had a reading of -0.9% growth in GDP. This was after a reading of -1.6% for the first quarter.
- I have even referred to this two quarters of negative growth as meaning we are in a recession. The truth is the recession is not official until the NBER declares it. NBER is National Bureau of Economic Research. I think it is basically 8 economists who make the declaration.
- Now, we may not get an official declaration from the NBER for a few months. Often the economy is out of a recession before one is officially declared. This is simply because by the time they get all the data they need to render a final decision months have passed.
- Regardless, what does it mean that we are in a recession?
- Actually, before we get there I wanted to share a quick bit of useless information. In mid-April there were less than 5,000 articles a week in US publications about recessions. Fast forward two months and there were roughly 21,000 articles a week. This certainly could be a reason so many people thought we were already in a recession. Also, be careful what you wish for. If people are thinking we are in a recession they may act like we are in one which can bring one. It sounds weird, but is true.
- Also, I am confident the number of articles on recessions is spiking again. I feel an obsession here.
- Back to the question of what does this mean? As far as the market, not a whole lot.
- The stock market and recessions are two different things. Read that again if you wish.
- But I bet you are wondering what the stock market has done after recent recessions. It’s okay. Be honest. You want to know.
- Let’s look at the three most recent recessions and how the S&P500 performed after the Bear Market ended (yeah, they aren’t the same thing but it is how the data is measured).
- DotCom Bubble – 1 year past the end of the Bear Market (down 49% at low point) the S&P was up 34%. 5 years later it was up a total of 101%. 10 years later it was up a total of 86%, so a little pullback from 5 years. This was an 8-month recession.
- Mortgage Collapse – 1 year past Bear Market (down 57%) the S&P was up 69%. 5 years up 177%. 10 years up cumulative 311%. Dang! 18 months for this recession.
- Covid –The S&P500 was down 34% at one point. 1 year from the bottom of the Bear Market it was up 75%. Talk about whiplash. Fastest recession of the bunch at 2 months.
- The average recession lasts from 6-12 months. Roughly 3-5 million jobs are lost and unemployment rises to the 6 percent range. We also see the stock market lose another 5-10 percent and the same with home prices.
- Now, we are definitely seeing a slowdown in the economy as reflected by the negative GDP number. However, unemployment numbers are still low and lots of jobs continue to be created, although I see more headlines about layoffs. Wages continue to rise but they are not keeping up with inflation.
- The Fed continues to raise their Fed rate, which is pushing up borrowing costs. This should continue to slow down spending and cool the economy.
- As to the market, the stock market is usually 6 months ahead of the economy itself.
- What does this mean? Well, the market has done well in July. The S&P is up more than 9% for the month. This could mean we are heading out of the Bear Market and the recession may be relatively short, if we truly are in a recession.
- On the other hand, it could just be a bounce and we could revisit and retest the low point. Anyone who tells you they know has a bridge in Brooklyn to sell you.
- Ultimately, recessions are normal and healthy. They help reset the economy to something more normal, or one may say - boring. Fortunately, we have been through enough we have lots of data to use to help lessen the impact of one and hopefully get us out of it sooner.
My final comment is a joke I heard when I visited the Federal Reserve in DC a million years ago while in school. It went – Why are there no one-armed economists? Because they can’t say “on the other hand.” The point of this joke, which fell flat when they told it, is economics is a soft science and a recession or a down stock market is nothing the Fed can just fix/avoid with a proven solution. In the meantime, I am now going to play Animotion’s ‘Obsession’ and replace it with ‘recession’ in my head. You’re welcome for the earworm I just planted.
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.