Recession or no recession… that is the question

Every investor knows that recessions and bear markets go hand in hand. But the definition of a recession often seems harder to pin down. So are we in a recession? And if not, does that mean disaster has been averted or is the pain train still rolling towards investors? This is an important discussion because it helps us appreciate what lies ahead for the stock market (SPY). We'll cover this vital topic in this week's commentary. Read below.

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In previous comments, I oversimplified the definition of a recession to the common belief that 2 quarters of GDP contraction means a recession. If it was that simple...then the case was closed because Q1 and Q2 were both negative.

Yet with most things related to investing... it's never really that simple. And not everyone agrees with this definition.

Or maybe we could use this old economist joke that also attempts to define recession:

What is the difference between a recession and a depression?

A recession is when your neighbor loses his job...a depression is when you lose your job.

Yes, this joke may explain why most economists aren't on the comedy circuit ;-)

Ultimately, the official arbiter of what defines a recession is the National Bureau of Economic Research which normally weighs in months after the fact. That means they haven't yet called it a recession...and probably won't if you like the following definition in the FAQ section of their site:

"The traditional NBER definition of a recession is that it is a significant drop in economic activity that extends throughout the economy and lasts longer than The committee is of the opinion that while each of the three criteria — depth, diffusion and duration — must be met individually to some degree, the extreme conditions revealed by one criterion can partially compensate for the weaker indications of another. For example, in the case of the peak of economic activity in February 2020, we concluded that the fall in activity had been so large and so widely diffused throughout the economy that the slowdown should be characterized as recession even though it turned out to be quite brief. The committee then determined that the trough occurred two months after the peak, in April 2020.”

Even though they have tried to make this accessible to the layman, it still leaves something to be desired. The main thing they need to see is PAIN. And the main measure of pain is job loss, which is a leading indicator that remains positive, as we saw in today's surprisingly robust government jobs report.

On the other hand, I stand by what I said in my Reitmeister Total Return review earlier this week in the section below:

Employment is still strong: that's the point everyone likes to talk about. However, most people are not economists...because if they were, they would know that employment is a lagging indicator. Often still beautiful as things go straight down the toilet.

This is where we are now. But the longer inflation stays in place...the more damage is created...the more likely job loss is to be the next step, resulting in:

Lower income > lower expenses > ...