How a recession is declared
By the time a recession is official, the stock market has usually already fallen and started recovering.
Stop waiting for the news to tell you it is safe.
How a recession is declared works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The market moves first, and recovers first
Shares fall before the data does and start climbing while the news is still uniformly awful. Waiting for the news to improve means buying after the recovery has happened.
- 1
The two-quarters rule is a rule of thumb, not a definition
It is a handy shorthand that appears in every headline. The official arbiters use a broader judgement: employment, income, production and spending, not GDP alone.
- 2
The declaration comes late, on purpose
The data is revised for months afterwards, so the committee waits until it is confident. Recessions have been declared to have begun a year before the announcement, and occasionally after they have already finished.
- 3
The market moves long before any of that
Share prices reflect expectations, not the present. They typically fall before a recession is visible in the data and begin recovering while the news is still uniformly awful, because the market is pricing the recovery that follows.
Waiting for the economic news to improve before investing means buying after the recovery has already happened, which is the most expensive form of prudence there is.
- 4
So the label is nearly useless to you
By the time the word is official, the information is in the price. The declaration is a historical record, not a signal, and treating it as a signal is how people sell at the bottom.
You can explain why shares often rally during the worst of the economic news.
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By the time a recession is official, the stock market has usually already fallen and started recovering.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.