How Often Do Recessions Occur – In case you missed the news, US stocks have officially entered a bear market. As of Monday of last week, their cumulative decline since January 3rd, as measured by major cap indexes (my source is the US market index, but the S&P 500 performed similarly) was 22.5%. Since bear markets are traditionally defined as losses in excess of 20%, a dubious honor has been achieved.
Five of those six bears have followed recessions. The exception was on October 19, 1987, when US stocks fell 22%, convincing many employers that an economic downturn was imminent. (My company laid me off five weeks later. I was scrambling to find a new position at a small startup called… .) But the thunder didn’t bring the rain.
How Often Do Recessions Occur
So far so bad. Judging by the admittedly small sample, bear markets were accompanied by recessions in 83% of cases.
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However, this initial impression requires an asterisk. First, the tech crash recession was severe, lasting just eight months and reducing the nation’s real gross domestic product by 0.3%. Technically, the period met the technical definition of a recession, but the economy was only temporarily slow rather than in deep trouble.
Second, the official definition of a bear market omits four instances where stocks lost more than 18% but less than 20%, namely the summers of 1990, 1998 and 2011, and the fall of 2018. The first of these periods was accompanied by a mild recession. The other three were, like Black Monday, false alarms.
A slight loosening of the bear market standard by setting the qualification barrier at 18% therefore enables a much more favorable forecast. Over the past half century, US stocks have fallen by at least 18% ten times. Four of these stock market declines were crying foul; two accompanying mild recessions; and four were related to the real thing. Using this measure, the probability of a truly bad outcome is reduced to 40%, compared to the original 83%. Better news indeed.
The U.S. stock market is generally considered a leading indicator, meaning that its performance indicates what will happen next. Stock prices often serve as economic guides. For example, even as concerns about COVID increased in April 2020, the stock market rallied anticipating a possible return to corporate profitability. Does the same, I wondered, apply to bear markets and recessions?
Market Performance During Recessions
So the title of this column asked – and the answer surprised me. As it turns out, the onset of bear markets can predict economic slippages, but when the bear actually arrives, as measured by the 20% threshold, a recession has begun. The following chart shows the number of months separating previous bear markets from the recessions that followed them. In all cases, except for March 2001, the amounts are negative. Bear markets did not drive the economy; they were lagging behind.
For the most part, the economic problems were already evident with the arrival of the bear. In 1974 and 2008, the economy was in the middle of the second quarter of a recession out of three attempts. The situation in 1982 was even more evident as a bear market emerged as the recession entered its second year. Only in 2001, when the recession was mild, and in 2020, when it came very suddenly, did the economy not lead the stock market. On these occasions, the events were simultaneous.
The question is, are stocks tracking the progress of the economy today? It’s hard to say. US real GDP, which takes inflation into account, shrank by 1.5% in the first quarter of this year. If this trend were to continue, this bear market would fit the usual pattern of coming to fruition a few months after the start of a recession. However, most researchers — as evidenced by this June 15 post from The Conference Board — believe that GDP will be positive in the second quarter. Perhaps their estimates will turn out to be too optimistic. But now the signs of a recession are even more removed than they were during the bear markets of 1974, 1982 and 2008.
There is another difference between the current bear market and its predecessors: the unemployment rate. A recessionary bear market usually occurs when the unemployment rate begins to rise. (The only exception occurred again in 2020 due to the almost immediate impact of COVID.) In contrast, unemployment today hovers near a 50-year low.
Do Bear Markets Lead To Recessions?
Except for early 2020, when the flurry of COVID torpedoed unemployment and stock prices at the same time, unemployment has always risen in bear market recessions for months before stock market losses exceeded 20%. (To give one example, the bear market of April 1974 occurred after five consecutive months of rising unemployment.) If this bear market does indeed coincide with a recession, the signal provided by the unemployment rate will be markedly different from past phenomena.
A quick look at the evidence shows that bear markets usually mean recessions are already upon us. However, looking at the matter more broadly, by 1) softening the definition of a bear market, 2) distinguishing between mild and severe recessions, and 3) taking into account both GDP growth and the unemployment rate, changes this conclusion. While a recession could certainly occur in 2022—and becomes a greater possibility with each rate hike by the Federal Reserve—history suggests that the current bear market is likely a false alarm.
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Here’s An Explainer Of How Recessions Begin
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Select your site edition. In order to ensure that the site is appropriate for you, we need to know whether you are an individual investor or a financial professional. Recessions can be complicated, misunderstood, and sometimes downright scary. Given the nearly 10-year expansion in the U.S. and increased market volatility, investors may be wondering if the next recession is just around the corner.
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In our opinion, we do not believe that a recession in the US in 2019 will be imminent. But with the economy firmly in late-cycle territory, we should be more aware of the prospects ahead.
The implications run much deeper than just the US economy – the business cycle has very real implications for portfolios as well. Since stocks tend to peak months before a recession begins, it’s never too early to start asking the right questions.
Recessions occur when economic output declines after a period of growth. They are a natural and necessary part of every business cycle. The US National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that spreads throughout the economy and lasts for more than a few months, usually seen in real gross domestic product (GDP), real income, employment. , industrial production and wholesale-retail.” It is also usually defined as at least two consecutive quarters
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