A Recession Is Coming

Billionaire investor and activist, George Soros, claims that markets move according to the principle of reflexivity. In his book, The Alchemy of Finance, he writes:

“In situations that have thinking participants, there is a two-way interaction between the participant’s thinking and the situation in which they operate.”

This sums up booms, busts, and economic cycles. You think it’s happening so you act in a way that makes it happen.

That’s all of life.

In his book, Wanting, Luke Burgis writes:

“People worry about what other people will think before they say something—which affects what they say. In other words, our perception of reality changes reality by altering the way we might otherwise act. That leads to a self-fulfilling circularity.”

The prevailing narrative is that a recession is coming. I’m here to tell you that’s true. A recession is coming. But when? That’s the problem. No one knows. If someone tells you they do, they’re lying or trying to sell you something.

What does it all mean? Let’s break it down.

What is a recession?

First, we need to define a few key terms.

Gross Domestic Product (GDP): The collective value of all finished goods and services made within a country during a specific period of time.

GDP provides a sort of “snapshot” of a country’s economic size and output. It is often used to define whether a country has a healthy or unhealthy economy. Of course, there are limitations to that definition.

As Robert Kennedy famously said,

“GDP measures everything. Except that which makes life worthwhile.”

There are a couple of different definitions for a recession.

The standard definition is two straight quarters of negative GDP.

The National Bureau of Economic Research (NBER) defines it as:

“A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

Simply put, a recession is an economy shrinking or slowing down.

According to NBER, there have been ten recessions since 1945. That’s about one every eight years on average.

The average recession lasts ten months while the average expansion (the economy growing) lasts an average of 57 months. Funny enough, the average human spends all 67 months asking if they should be waiting for a better time to invest.

Speaking of investing, you may be wondering how markets hold up during a recession. Let’s explore that.

Markets during recessions

What’s interesting about a recession is that you don’t even know you’re in one until months later. You may feel it well before the experts tell you it happened. The stock market is a whole other beast. You feel the joys and pains of ups and downs in real-time. The transparency of the market is a gift and a curse—creating efficiency while also tempting you into misbehavior.

The stock market is a projection machine—always anticipating what’s coming. That’s why you’ll hear pundits talk about things being “priced in”. Participants are guessing at what’s coming and acting accordingly. Sometimes they’re right, other times they’re wrong. Meanwhile, the market keeps on guessing.

It’s easy to think there’s a direct connection between markets and the economy. It makes sense. If there is a recession surely the market must be down too, right? Also, if the economy is booming it must mean the markets are cruising.

Not exactly:

More than 60% of the time, the S&P 500 (what most consider the market) had positive returns during a recession. 42% of the time there have been double-digit returns during an economic slowdown.

Yes, there are times when the market plummets during a recession. Some of the worst market crashes ever were in the middle of the economy pulling back. But to say there is a direct link would be misleading. Markets and the economy are often misaligned.

What should I do?

First, it’s important to remember that truly nobody knows what’s coming and when. That may seem obvious to your brain. But sometimes your stomach will deceive you into thinking something different in the moment.

Realize that media outlets are incentivized to work you up with fear and drama. It’s what keeps you coming back for more. Don’t make decisions with your money based on what you see on the news.

Have a plan that is built around your personal situation and values. Textbook definitions and rules of thumb only tell part of the story. Every single person feels a recession, inflation, market crashes, etc. differently depending on their unique vantage point. If you’re a young dentist starting out in your career, then I’d argue a recession along with a market downturn is a wonderful opportunity. If you’re a 55-year-old real estate agent that is behind on saving for retirement, a recession can be much more threatening. Build a plan that fits your specific situation.

Ideally, you should have an objective third party in your corner to turn to when things get scary. And I acknowledge they are scary right now. You need someone that isn’t going to be emotional about your money. Someone who will be able to help you walk back from the ledge. This person should know your situation and what you’re trying to accomplish long term. This could be an advisor, a CPA, or just a friend. Either way, the value of objectivity is priceless when it feels like the walls are closing in.

Lastly, keep investing. No, it’s never a good time to “stop and wait for things to calm down”. Things aren’t calming down. That’s not how the world works. And even when things feel calm you’ll just start thinking or hearing, “Things are too good. They have to turn around at some point”. Keep in mind that there has never been a time where three years after a recession stocks weren’t up. The five years after a recession, the S&P averages a gain of 120%. You’ll never know when it’s going to start or end. So just keep investing through it all.

This is where your money is made. This is when you build wealth—in times of turmoil. The payoff of a long-term gain comes at the cost of short-term pain. I promise it’s a price worth paying.

Here’s to making money matter!