Recession?

A recession is defined by Oxford Languages as “a fall in Gross Domestic Product (GDP) for six straight months”. So to be able to say “hey, we are (or were) in a recession!” you have to look backwards at least 6 months in time. Knowing this, would any of us be shocked if in the next 6 months or so we see headlines which read “the US is officially in a recession”? I wouldn’t be surprised.

The next natural leap is to assume “well, if we know the odds are high of a recession being official in the next ≈ 6 months…….can’t we just assume that will make stocks go down? So wouldn’t selling stocks and trying to time the market make sense?”

History says “not so fast”.

Why? Because we have seen many recessionary years, with negative GDP, where stocks have gone UP during that same year. For example:

This makes no sense, right? How could the economy be receding, but stocks move higher?

One of the biggest reasons is stocks are often a leading indicator. Frequently stocks will move based on the next 6 – 12 months, and not the last 6-12 months.

This is what makes investing so challenging for the inexperienced. Assuming “I can just watch the news and get a feel for how things are in the economy, and then use that information to buy or sell stocks” often leads to disaster.

Sources: US Bureau of Labor Statistics and FactSet.

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