Why Recessions Matter

Here are some reasons why it matters if the U.S. economy is in a recession or not:

 

Jobs

If you have a job, you may be at particular risk of losing that job during a recession. Labor costs tend to be a significant portion of a company’s costs. A typical company’s sales are likely to decline during a recession. To help reduce costs during a recession, it’s not uncommon for companies to look to reduce labor costs through layoffs. Thus, if you are confident that the U.S. economy is currently in a recession or is about to enter a recession, you may consider engaging in lawful and ethical activities that may increase the probability that you won’t be one of the individuals who gets laid off.  For example, your boss may be seeking volunteers to tackle a challenging project. By volunteering for such a project, particularly during a recession, it may increase the probability that your retain your job, although there’s no guarantee that it will help.  There can be a silver lining with job losses, though.  For example, you may have an annoying neighbor in your neighborhood.  Possibly such individual will lose his or her job during a recession and then due to financial reasons will need to move from your neighborhood.

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Potential Profit Opportunities

If you are confident that the U.S. economy is currently in a recession or is about to enter a recession, it’s possible you could profit from the economic decline by, say, shorting stocks. Stock investing is a whole other arena, but briefly, if the recession is of sufficient length, shorting could potentially be profitable on the downside. This is not to say that one would go short on the first indication of a recession starting; it’s much more involved with that and is a whole separate analysis. Also, don’t confuse Dr. Halstead’s econometric model signals for the economy as signals for the overall stock market.  Although there may be at times some crossover between the two, the stock market requires a separate analysis.

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During a recession, “great companies” are likely to go on sale.  During a recession, it’s not just lousy companies’ stock prices that go down but even great companies’ stock prices go down – some more than others. Dr. Halstead keeps a list of companies he considers to be “great companies”. This is whole separate analysis, but if one is confident that the U.S. economy is coming out a recession, one can potentially invest in “great companies” at a discount and potentially make sizable profits. The stock market usually performs the best when the U.S. economy is emerging from a recession. Again, stock investing is another separate analysis and it’s much more than simply buying “great companies” as the economy emerges from a recession.

 

If the U.S. economy is not currently in a recession and is unlikely to enter into a recession in the near future, then the overall U.S. stock market is unlikely to go down by very sizable amounts like over 50% over that time period. There could be a stock market correction, but the correction is unlikely to turn into a devastating bear market if the economy is not in a recession and/or is not likely to enter into a recession in the near future.