Are We in a Recession?

Are we in a recession? This is a great question. The answer, like some relationships, is a tad complicated. 

In short, the answer is yes, technically we are in a recession. However, this recession is more of a rolling recession due to the conditions that followed COVID.

In the world of finance, a recession is usually accompanied by a significant rise in unemployment with two-quarters of negative GDP.

While we technically have two quarters in a row with a negative GDP reading, we still have a very strong labor market that the Fed is trying to abate to help mitigate the effects of inflation. Once inflation is entrenched in the system, it is very difficult to remove it.

Unemployment

The current unemployment rate is 3.5%. Based on historical data, the unemployment rate during a recession rises to and gets above the 5% threshold that is commonly considered to be full employment.

Once you start getting over 5% unemployment, you begin to see pain. Until you get to that 5%+ number, any superficial recession based on GDP contraction alone is not a recession. It is technically a recession, but it does not feel like a recession to the vast majority. Most of us still have a job.

This is the reason we continue to see the CPI and PPI data come in hot despite all the efforts of the Fed to curb inflation via rate hikes. It’s entrenched.

So Are We in a Recession?

So let me ask the question again, “are we in a recession?” The answer is yes, but it is not an actual recession yet.

When and only when we see the unemployment rate start to tick higher will it officially become and feel like a recession. The good news is that this recession is being forecasted well ahead of time.

It is very possible and highly likely based on the actions of the Fed that we will be in a real recession at some point next year. The bad news is that it is coming. The good news is that we have been here before, and every recession has transitioned into a new bull market.

If we do have a real recession next year where we see unemployment start to rise, the good news is that we will be near a stock market bottom.

Stock Market Bottom and Rally

Once the unemployment rate starts to rise with the slowing GDP, the cat will be out of the bag.

This usually leads to the Fed cutting rates at some point during the recession which has historically always led to a stock market bottom and rally. Will you be prepared? 

While most investors will not use their time wisely and bemoan the fact we are in a recession, smart investors will be on the hunt for new leaders. Not for old leaders. Once you enter into a secular bear market, when the turn comes, as it always does, the odds that the old leaders will be the new leaders of the next bull market are slim to none. 

This is why I am always on the hunt for a batch of new leading stocks in new leading industry groups that will lead the market higher after the market bottoms.

This bottom will come either when the Fed pivots (Q.E. replaces Q.T.) on interest rates or investors capitulate via panic selling.

As of this moment, neither has occurred. We are still in a downtrend. The bear market is still cyclical and has not gone secular, but the duration of this decline from all-time highs suggests that it’s just a matter of time.

What Should Investors Do in a Recession?

The best position to be in right now, for most investors, is cash. However, the smartest investors will dollar cost average into the overall market knowing that the stock market has always moved higher following any bear market. Investors can also use Pickilo to visualize and track their portfolio risk to better position themselves.

Patience is required here. The good news is that even if we do go into a real recession in 2023 this too shall pass, just like they always do.

I’ll be ready when the turn happens. Will you?