Do you believe there has been—or soon will be—a significant, broad-based decline in economic activity lasting more than a few months? If so, you think we’re either in a recession or heading toward one. That’s not just opinion—that’s the official definition used by the National Bureau of Economic Research, the organization that formally declares recessions in the U.S.
Why does this distinction matter?
If the answer is yes, history suggests we could be in for a more prolonged and severe market downturn than where we currently stand. If the answer is no, then this, too, shall pass.
The economy and the stock market are intertwined, but not all market declines are the same. Severe economic downturns tend to bring deeper, more prolonged stock market declines. In contrast, absent a recession, market volatility—while painful—is usually shorter-lived and less severe than many fear.
What history tells us:
Since 1980, we’ve seen 16 corrections of 10% or more. Of those, 6 occurred during a recession—and the difference in market returns is striking. Corrections that happen outside of a recession tend to recover faster and deliver much stronger forward returns.
