What is a recession?

A recession is when the economy slows down for a period of time. It’s often defined as when the country’s total production of goods and services (GDP) decreases for two consecutive quarters, or six months. The National Bureau of Economic Research (NBER) defines a recession as a significant drop in economic activity that affects many areas, like real GDP, income, employment, industrial production, and sales in stores. This decline typically lasts for more than a few months.

What causes recessions?

Recessions can happen for many reasons, but they’re usually caused by problems that need to be fixed. For example, in its most simplified explanation, the 2008 recession happened because there was too much debt in the housing market, while the 2001 recession was caused by a bubble in technology stocks. A sudden event, like the COVID-19 pandemic, can also cause a recession if it hurts company profits and leads to job losses.

When more people lose their jobs, they tend to spend less money, which puts more pressure on businesses, their earnings, and stock prices.

How long do recessions last?

The good news is that recessions typically don’t last very long. Our analysis of 11 cycles since 1950 shows that recessions have lasted anywhere from two to 18 months, with the average duration being about 10 months.

In the past 70 years, the U.S. has been in an official recession for less than 15% of the time. Also, the overall impact of recessions on the economy has been relatively small. On average, the economy grows by about 25% during periods of growth, but it only shrinks by about 2.4% during a recession. Even during a recession, stock market returns can be positive, because some of the best stock rallies happen toward the end of a recession.

A look back to 1976 shows that market declines have occurred EVERY year. Downturns are regular occurrences.

A look back at S&P 500 Index returns since 1928 the market was positive 73% of the time, or an average of three years out of four. Stocks sustained negative annual total returns in only 27% of all years. 

It's a good time to remain focused and seek balance.

Here are ways you can be adequately prepared for market downturns or potential recessions:

1. Maintain an Emergency Fund: If you're still working, set aside 6 months’ worth of living expenses in a high yield savings account. This can help you cover unexpected costs or job loss during a recession. If you're no longer working, maintain 12 months to 2 years worth of spending needs in a high yield savings or money market. 
2. Reduce Debt: Pay down high-interest debt like credit cards. Lowering your debt will reduce your financial stress if income decreases.
3. Cut Back on Non-Essential Spending: Review your expenses and see where you can save. Cutting out unnecessary costs can free up money for other savings or investment goals.
4. Diversify Investments: If you invest in stocks or other assets, make sure your portfolio is diversified. This means spreading your investments across different sectors and asset types to help mitigate risk, and also keep pace with inflation.
5. Keep Your Skills Up to Date: Focus on improving your job skills or learning new ones to stay competitive in the job market, especially if certain industries are more affected by a recession. 
6. Build professional and personal relationships: Keep your LinkedIn profile and resume up to date and engage with your  connections both in person and via social media channels, even if you're not currently looking for work. 
7. Create Additional Income Streams: Consider ways to make extra money, like freelance work, reviewing passive income created from investment accounts, or rental property to create more financial stability.
8. Stay Informed, but do not panic: Keep an eye on news so you can make informed decisions, but avoid doom scrolling. We can only control our own actions, not the global markets and certainly not the current geopolitical climate.
9. If you have concerns, don't hesitate to reach out.