What is a Recession?
A recession is a broad-based contraction in economic activity. While the popular definition uses two consecutive quarters of negative GDP growth, the National Bureau of Economic Research (NBER) considers a wider range of indicators including employment, industrial production, and retail sales. Since 1945, the US has experienced 12 recessions, with an average duration of about 10 months.
Investing During Recessions
Recessions typically see equity markets decline 20-40% from peak to trough, but recoveries often begin before the recession officially ends. Defensive sectors like utilities, healthcare, and consumer staples tend to outperform cyclical sectors during downturns. Dollar-cost averaging through recessions has historically rewarded patient investors, as buying at depressed prices boosts long-term returns significantly.
Key Considerations
Predicting recessions with precision is extremely difficult. Leading indicators like the yield curve inversion, declining consumer confidence, and rising unemployment claims provide signals but with variable lead times of 6-18 months. Maintaining an emergency fund and diversified portfolio is more practical than attempting to time the market around recessions.