Two consecutive quarters of negative GDP (Gross Domestic Product) – this has been a reliable rule of thumb to accurately determine if a recession has occurred. The National Bureau of Economic Research (NBER) uses more complex formulas to officially declare a recession, and in complicated times like these, the rule of thumb may not be accurate enough to determine if the economy has been negatively impacted for a long enough period of time for a recession to officially occur.
A recession is declared after we have already lived through it. And what is more, we could already be experiencing economic recovery when the reality of the recession is still sinking in. Because recession data is lagging, we do not make investment decisions based off recession fears, predictions, or forecasts.
Managing partner of Financial Enhancement Group, Joe Clark, CFP®, often says, “The stock market and the economy are not the same.” They can correlate in certain time periods, but they are two separate animals that respond to different masters. Stock market prices respond quickly and are typically trending up or down well before economic health indicators can be measured. When you look back on market performance during the last six recessions, the market is gaining positive momentum well before the recession has officially ended.
In early November of 2022, Facebook announced that they would be laying off 11,000 employees. This is an economic indicator that would contribute to the possibility of a recession. However, the price of Facebook stock has increased over 50% since this announcement. Salesforce (CRM) announced that it would be laying off 10% of its employees at the beginning of January 2023. Again, chalk this up as another point towards the possibility of a recession. But Salesforce’s stock has increased almost 25% since the announcement.
It is not a guarantee that a company’s stock price will rise when layoffs are announced. I am sure that there are plenty of examples where layoffs lead to the decline in a stock’s price. What is most important is the concept that bad economic data does not guarantee bad stock market responses. So often we search for a reason to explain why the market moves up or down. It just is not that simple. If your investment strategy is to buy when you think the market has bottomed and to sell when the market has peaked, your likelihood of success is extremely low. The real winners in the stock market are long-term investors who make contributions to their 401(k) every paycheck. They increase their savings rate when they get a raise. They ignore the noise and stay on the ride, even when it gets scary.
Markets and economies work in cycles – expansion, peak, trough, and recovery. Recessions and market corrections are a normal part of the cycle. While these negative phases of the cycle are painful, successful investors will be rewarded for ignoring the noise and sticking to their long-term investment goals.
Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.