Stock Investors Better Hope a Recession Has Started
Equity declines of more than 20% that were not followed by deep economic contractions have always foreshadowed even bigger losses.
A recession now may be good for stocks later.
Photographer: Daniel Roland/AFP via Getty Images
A slanging match has broken out about whether the US economy is in recession. Everyone agrees that a recession is a contraction in real economic activity, but there’s no consensus on how deep, widespread and long-lasting the contraction has to be to deserve the “recession” label.
While economists can debate theory, and politicians can explain why it’s the other party’s fault, investors should take a pragmatic view.
Recessions are the part of the business cycle that clears away economic deadwood and sets the stage for the next expansion. Debt is reduced because weaker consumer and business borrowers default and stronger borrowers cut spending. Failed projects and ideas are written off and no longer suck capital down black holes. Bubbles deflate. Frauds are exposed and punished. Workers move, retrain and otherwise position themselves for future economic growth. Businesses refocus on the most promising areas. Obsolete businesses fade away, clearing the ground for innovations.