Defining a recession

Yesterday's announcement that US gross domestic product (GDP) declined 0.9% in the second quarter of 2022 has driven much debate about whether or not the U.S. is currently in a recession. Yes, two quarters of negative economic growth is the “rule of thumb” many use as the unofficial sign of a recession. However, the official call will come from the National Bureau of Economic Research (NBER) and they use a more comprehensive definition than the 2 sequential quarters of GDP contraction rule of thumb.

 Economies are cyclical by nature, which means recessions and recoveries will always lie ahead. Recession, or not, the economy has lost momentum – that much is clear. However, it is important to remember that the markets are forward looking – and this economic data is in the rear-view for the markets. 

 The “R” word sounds scary – and the media exacerbates this – but it doesn’t have to be for long-term investors. Pulling from Howard Marks recent memo below, “Since 1920, there have been 17 recessions as well as one Great Depression, a World War and several smaller wars, multiple periods of worry about global cataclysm, and now a pandemic.  And yet, as I mentioned in my January memo, Selling Out, the S&P 500 has returned about 10½% a year on average over that century-plus.”

 Today's highlight article from the Wall Street Journal's Real Time Economics takes a deeper dive into the variables the NBER looks at and explains why calls of recession may be premature. 

Markets on sale

"In retail stores, crowds chase bigger sales… But in financial markets, the crowds head for the exits during sales…" This point is highlighted by the extreme bearish reading by BofA's Indicator. When someone is bearish, this means they believe asset prices will continue to decline. Its "Prime Day" sale in the markets, but despite valuations everyone is still extremely skeptical.

What Else We're Reading

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