A recession is two consecutive quarters of negative GDP growth, or economic contraction.
Before we dive in, let’s describe the importance.
We might be starring down our next recession, as the Coronavirus has basically stopped economic activity in my parts of the globe.
Economic expansions historically last about 8-10 years. The current expansion has lasted for more than 10 years, partly powering U.S. stocks to their longest bull run in American history, a bull run that ended this year, as the market officially entered bear market territory.
Expansion is when GDP grows.
Gross Domestic Product is the total value in goods and services produced.
If GDP in 2019 was $20 trillion and then $20.4 trillion in 2020 (now unlikely), that would be 2% growth, where we were trending quarterly for the past year or so.
But what if GDP comes in at $4.9 trillion in the second quarter of 2020, under maybe the $5 trillion in the same quarter of 2019? That’s negative growth of about 2%. And let’s say Q3 posts a negative growth rate. That’s a recession.
It likely means companies saw declining revenue year-over-year. If those companies couldn’t lay off enough workers or decrease operating expenses enough, earnings would likely fall extremely hard.
The stock market prices this in before hand (markets are generally functional. They’re functioning right now — pricing in a recession, which looks likely).
What to expect out of stocks now? Watch the quick video above to find out.