Capital IdeasTM

Investment insights from Capital Group

Market Volatility
Recession watch: lessons from history and key economic indicators
Jared Franz
Darrell Spence
  • Recessions are a necessary part of every business cycle, are infrequent, and tend to be small blips in economic history.
  • An inverted yield curve in the US has been among the more reliable recession indicators over the last 50 years, typically following one year to 18 months after.  
  • Bear markets often coincide with recessions, but equity returns can often be positive over the full length of an economic contraction. Sectors including utilities and consumer staples have held up better during slowdowns.
  • Fixed income could be integral to successful investing during a recession, potentially offering stability and capital preservation.
  • Global recession appears unlikely until later this year or early 2023. The exact timing will likely depend on the pace and magnitude of central bank moves as they attempt to bring inflation back to target levels.

Recession risk is clearly elevated around the world following the COVID pandemic and Russia’s invasion of Ukraine, especially as central banks are forced to hike interest rates as they try to control spiralling inflation.

While investors are understandably asking when the next economic downturn might hit, history indicates that recessions are notoriously hard to forecast with any accuracy and even the term itself is subject to debate. For reference, the US National Bureau of Economic Research classifies recession as ‘a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real [inflation-adjusted] gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales.’

One commonly cited definition is two consecutive quarters of negative GDP and by that measure, the US is already in recession. On the other hand, however, consistently strong job growth, historically low unemployment and solid growth in consumer spending would appear to argue against that.

Rather than attempting to forecast exactly when global markets might fall into actual recession this time, this paper examines what economic indicators are worth monitoring to signal slowing conditions, how equities have fared in previous downturns, and, most importantly, what investors might consider doing to prepare.

Jared Franz is an economist with 18 years of investment industry experience. He holds a PhD in economics from the University of Illinois at Chicago, a bachelor’s degree in mathematics from Northwestern University and attended the U.S. Naval Academy. 

Darrell R. Spence covers the United States as an economist and has 31 years of industry experience (as of 12/31/2023). He holds a bachelor’s degree in economics from Occidental College. He also holds the Chartered Financial Analyst® designation and is a member of the National Association for Business Economics.

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