You won't know when a recession starts: 5 key facts about downturns

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5 days ago

The looming threat of recession has hung over American consumers for what seems like forever, an ongoing economic drama that stretches back to the early pandemic years.
The chances of a recession in 2025 currently stand at about 40%, according to a May 27 report from J.P. Morgan. A month ago, many forecasters put the odds higher than 50%.
If a recession comes, how will we know? When will it end? What will be the fallout on Wall Street?
Here are some answers, drawn from experts at Investopedia, Motley Fool, Fidelity, NerdWallet and other sources.
Economic downturns might seem to last forever: Endless months of corporate layoffs, shaky stock prices and general financial malaise.
Yet, going back to the Civil War era, the average recession has lasted only about 17 months. Since World War II, the typical recession has lasted about 10 months.
'The reason they've been getting shorter is that policymakers and the Federal Reserve and the Treasury have been getting more creative about how to deal with them,' said Caleb Silver, editor in chief of Investopedia. 'That could mean flooring interest rates. That could mean stimulating the economy by giving stimulus payments to households.'
Recessions feel interminable because of their impact on the job market, stock market and household budgets. The actual downturn might end in 10 months, but it 'may take us longer to bounce back,' said Niv Persaud, a certified financial planner in Atlanta.
Recessions are part of America's boom and bust cycle. And here's the good news: Boom times tend to be longer. In the post-WWII era, the average economic expansion has lasted for nearly five years.
The National Bureau of Economic Research defines a recession as 'a significant decline in economic activity spread across the economy, lasting more than a few months.'
By that definition, a recession isn't a recession until the downturn has persisted for at least a few months. Theoretically, we could be in a recession right now.
'You don't usually find out that you're in a recession until six months after you've been in one,' said Denise Chisholm, director of quantitative market strategy at Fidelity.
The economic bureau decides when a recession has started, Fidelity reports, measuring signs of sustained decline in purchasing power, employment data, industrial production, retail sales and gross domestic product, among other factors.
Typically, those metrics must fall for several months before the economic bureau invokes the "R" word. But not always: The COVID-19 recession of 2020 lasted only two months.
How convenient it would be for wary investors, searching for clues to the market's direction, if stock prices began marching steadily down on the day the economists announced a recession.
But the market doesn't work that way.
'The stock market is a leading indicator,' said Robert Brokamp, a senior adviser at The Motley Fool. The market anticipates economic trends, including recessions, months before they arrive.
'It starts to go down, generally speaking, six months before a recession,' Brokamp said. 'And it starts to recover six months before the recession is over, very broadly speaking.'
When you consider that we don't know a recession is happening until months after it starts, you begin to understand how hard it can be to make investment decisions in a recession.
'Stocks usually bottom out about halfway through,' said Chisholm of Fidelity. 'So, by the time you have learned you are in a recession, stocks, more often than not, have bottomed.'
The stock market and economy don't move in lockstep. Sometimes they seem to move in opposite directions.
'If we go into a recession,' said Silver of Investopedia, 'you might notice that the stock market didn't dip that much at all.'
However much investors might fret about the stock market in a downturn, history suggests the market will eventually recover. The S&P 500 took back all of its losses in the Great Recession of 2008, although not until 2013.
If you're retired and spending down your savings, then a recession can bring fiscal disaster. For just about anyone else, there's time to rebound.
The bigger danger, said Brokamp of Motley Fool, is losing your job.
Unemployment hit 10% in the Great Recession, the jobless rate peaking after the actual recession was over. Unemployment reached 14.7% in the brief COVID-19 downturn.
People lose jobs in recessions because companies are making fewer goods and selling fewer services, and thus, they need fewer employees.
'If you're still working, and you're not close to retirement, the big issue is job security,' Brokamp said.
To buy low and sell high is a mantra of investing. But timing those transactions can be tricky.
When to sell stocks is a particularly tough call, for the simple reason that stock prices tend to rise. You could sell your stocks on a day when the S&P 500 hits a record high, only to wake up the next day and watch the market climb higher.
Cashing out of the stock market in a recession is generally a mistake, experts say, because of the market's notorious volatility. It's hard to predict when stock prices will slide, how low they will go, or when they will recover.
'Selling stocks to try to protect your portfolio from a recession is going to be an almost impossible enterprise,' said Sam Taube, a lead investing writer at NerdWallet.
But buying stocks in a recession, experts say, can be a comparatively safe move.
The 'buy low' directive instructs that investors should purchase stocks when the market is down. In a downturn, stock indexes can fall 10% or 20% (or more) below their historic highs. Buying stocks at those times is a relatively easy call.
'History has shown us that the stock market recovers,' said Brokamp of Motley Fool. 'So, if you have the opportunity to buy stocks at a discount, you'll always be happy you did it.'
Remember, though, that months or years might pass before the stock market recovers completely from a recessionary swoon. Buying stocks in a downturn makes the most sense for investors who won't need the money for the holidays.
This article originally appeared on USA TODAY: 5 facts about economic recessions: You won't know when one's coming