What is a recession and how do equity markets respond to recession indicators? One common definition is two calendar quarters with negative real GDP. According to the“…. a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”According to the NBER, there have been seven official U.S. recessions since 1969.
History shows us that recessions have occurred for many reasons, but typically are the result of imbalances built up in the economy that need to be corrected. These include rising interest rates, inflation and commodity prices as well as anything that hurts corporate profits which may trigger higher unemployment. However, we currently are not seeing these issues: interest rates are near all time lows, inflation is muted, and unemployment is near the lowest in history.
Greater profits support higher stock prices. Conversely, when economic activity slows, spending declines, profits are reduced, and stock prices fall. The stock market typically continues to decline sharply for several months during a recession. It historically bottoms out approximately six months after the start of a recession and usually starts to rally before the economy picks up.
Not all stocks behave the same during a recession or periods of economic decline. History shows that consumer staples and utilities fare the best because they typically pay higher dividends than stocks in other sectors. Additionally, growth stocks may be the least attractive as they are typically more volatile and tend to trade more directionally with the overall market.
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