Before I studied economics at A Level, I used to think that bear markets = recession. I though this since the stock marketâs dismal days occupied my dad’s mind more than anything else! So when we were in a recession (with ’08 being particularly crazy though I was only a kid then) my dad would constantly tell me, âDinah, the markets are in bad shapeâ. I put 2+2 together and figured that when markets did badly it was because a recession was on its way. Or had already made its (unwelcome) entrance. Either way, there’s no such thing as a recession without poor stock market returns.
Bear markets are an important part of this (unwanted) process and shouldn’t be ignored! They can act as a warning sign of impending recession – markets pricing in that things will turn sour in the economy since they move quicker than economies because they are by definition forward-looking. The longer the bear market, the longer the recession. Usually. As a pretty rough rule.
Though bear markets can simply be just that – a bear market. Nothing more, nothing less. A mere cooling off period. Which is totally okay and 100% allowed since economies (much like us!) can’t keep going 24/7 with zero break. (Read here why recessions are normal and read here how you can recession-proof your portfolio).
But recessions are a lot more than falling stock market returns. The textbook definition of a recession is two consecutive quarters of negative economic growth. In other words, it’s 6 months straight of falling GDP. The thing about economic data that tells us whether or not we’re actually in a recession is that it is in the past. Data by definition means itâs already happened! If it ain’t happened there ain’t no data.
We’ll only know after the fact
So when we get our first quarter GDP results, the very numbers that help guide us as to whether or not GDP has contracted, the warning sign for recession, it means we could already been living in one. And when the next set of results (quarter numero duo) are published, confirming whether or not we were in a one to begin with, weâll know! Until then, itâs all just guessing really. But if it looks like a recessions, feels like a recession and smells like a recession, chances are it is a recession!
And right now, the signs are all around us. Except not the signs youâd typically expect! In the past 13 recessions the US has had since WW2 (I know, it feels way more) each one had these two things: falling GDP (aka less output) and rising unemployment. We’ve got falling GDP, check! But what about jobs? Are we shedding them like we should be?
Falling GDP = Less jobs to go around
When growth slows, it causes job losses. When companies arenât generating as much moola as they used to (or as they should be!) theyâve gotta cut costs in order to survive. Survival is key. And since wages are their biggest fixed costs, during recessions workers get laid off and companies conserve their cash. This isn’t the time for anyone to be splashing out.
Today, something highly unusual is happening. Economic output fell in the first quarter and signs suggest it did so again in the second. Yet the job market showed little sign of slowing in the first half of the year. The jobless rate fell from 4% last December to 3.6% in May. This gives economists a whopper riddle to crack. Yes, there are of course layoffs happening – look to the tech space (Klarna, Coinbase, Tesla are all laying off workers) but employment overall is pretty strong especially when compared to other recessions. Very odd times indeed!
At the end of last month, 1.3m Americans were collecting federal unemployment checks, a drop form the 1.7m that collected them on average in the three years leading up the pandemic. Psst: during that period the US economy was strong. Super strong. These numbers, when compared to previous downturns are astonishing. The number of people receiving these benefits were above 6.5m during the credit crunch and were way higher than the 3m during the two earlier downturns.
What we’re seeing is that there is still demand for workers despite tanking economic activity! In other words, companies are hiring rather than laying off. This is really weird. But there’s definitely uncertainty for job seekers and the cracks are starting to show. Though entering a recession with such a tight labour market really is novel, guys. It’s unprecedented. Been a while since that word has cropped up which I suspect is a jolly good thing!
Everything’s uncertain except for our desire to travel…!!
What’s perhaps even weirder and telling of these very odd times we’re living in is that demand for travel is soaring, while our economic prospects are tanking. This is most unusual and not how you’d normally expect consumers to behave as they enter a recession! You’d expect a tightening of pursestrings.
Just look at airports all over the world (Heathrow probably being the worst of all!) to see how airlines are struggling with the surge in demand. Despite the endless queues and multiple warnings from them (they told us so!) we’re still wanting to travel. And splash the cash.
Almost everyone I know is planning some sort of vacation this summer. One friend just returned from Mykonos while another jets off to the Big Apple. Mind you, I’m doing the barest minimum of travelling this summer. I don’t fancy being stranded in some remote country for gd-knows-how-long. No siree. It just ain’t worth it.
This is sure to go down in history as THE weirdest recession. Ever. Splashing out on travel coupled with a strong labour market is a sight to see. Really.
But either way, we shouldnât be taking the things we have for granted. Not our jobs nor the roof over our heads. Because all can really change in an instant.
Dear readers, always be prepared, stay ahead of the curve and be humble and grateful. Oh and keep going. Keep investing, keep hustling. No one knows what the future holds.
But, enjoy your summer! Whether you’re having a staycation (smartypants) or are braving the airpots (sillypants), have a good one and stay cool.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Knead Your Dough 