“The stock market has predicted nine out of the last five recessions!” Paul A. Samuelson, 1966
Recessions can be complicated, misunderstood and sometimes downright scary. With the U.S. expansion nearly 10 years old and market volatility elevated, investors may be wondering whether the next recession is just around the corner.
In our view, we don’t believe a U.S. recession is imminent in 2019. But with the economy ﬁrmly in late cycle territory, we should be more aware about the possibility down the road.
The implications go much deeper than just the U.S. economy — the business cycle has very real consequences for portfolios too. Since equities tend to peak several months before the start of a recession, it’s never too early to start asking the right questions.
But let’s start with the most basic question: What is a recession?
Recessions occur when economic output declines after a period of growth. They are a natural and necessary part of every business cycle. The National Bureau of Economic Research in the U.S. (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales.” It is also commonly defined as at least two consecutive quarters of declining GDP.
Past recessions have occurred for a variety of reasons, but typically are the result of imbalances that build up in the economy and ultimately need to be corrected. While every cycle is unique, some common causes include rising interest rates, inflation and commodity prices. Anything that broadly hurts corporate profitability enough to trigger job reductions also can be responsible. When unemployment rises, consumers typically reduce spending, which further pressures economic growth, company earnings and stock prices. These factors can fuel a vicious negative cycle that topples an economy into recession.