Whenever news about the economy turns negative, as it inevitably does, a lot of scary words get tossed around: market corrections, bear markets, and the big “R” word, recession.
As a responsible saver and investor, it’s important to understand the nuanced distinctions between these three concepts—and how to respond when they really do hit. Here’s what you need to know to protect yourself in times of downturn and avoid letting the media doom-and-gloom ruin your day.
FREE Tool Alert!
Fear not. Our Recession and Market Correction Checklist can help you proactively protect your finances and take advantage of low valuations if a downturn looks imminent.
Market Corrections vs. Bear Markets
While a recession impacts virtually every corner of the economy (more on that below), market corrections and bear markets are downward trends that specifically live within the stock markets. And while they can be temporarily painful, they are not necessarily indicative of a greater and potentially more impactful economic recession.
Market Correction
A market correction is defined as a decline of 10% or greater in the price of a security, asset, or a financial market. As the name implies, it’s usually viewed as the market re-centering itself back to its more neutral, long-term trajectory after a spike in stock prices.
Bear Market
A bear market is essentially a market over-correction. It’s commonly defined as a prolonged decline in stock prices with the major indices falling by 20% or more from their highs. The opposite of a bear market is a bull market, which is a market that’s on the rise.
Market Downturns Don’t Guarantee a Recession
According to the National Bureau of Economic Research (NBER), there have been 27 bear markets since 1928, but only 15 recessions in that same period of time. Market corrections are even more common; between 2002-2021 alone, the U.S. economy went through 10 market corrections, this according to the Schwab Center for Financial Research.
What is a Recession, Really?
Although there is no official definition for a recession, a popular rule of thumb is two consecutive quarters of decline in the country’s gross domestic product (GDP). For many experts, this definition is too narrow.
NBER—a private, non-profit, non-partisan think tank that is the official “declarer” of recessions in the U.S.—is one of those entities. It defines a recession as a “significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Those four words “spread across the economy” are the key differentiator between a recession and a market correction or bear market. A recession can impact virtually every aspect of our financial world, not just investing.
In fact, the NBER tracks six key indicators to determine if we are in a recession. (Notably, GDP is not one of them.) These indicators are considered to provide a more comprehensive view of the economy than GDP or the stock markets alone. Let’s look at what each of these indicators tells us.
The 6 Indicators of a Recession
Real Personal Consumption Expenditures
The primary metric for understanding U.S. purchasing power, real personal consumption expenditures tracks the value of the goods and services purchased by Americans each month.
Real Personal Income Minus Transfer Payments
Another indicator of consumer purchasing power, real personal income tracks personal income (wages, salaries, etc.) minus any “transfer payments” – aka benefits received where no direct services performed, such as Social Security or unemployment (mostly government benefits).
Nonfarm Payrolls
The nonfarm payrolls indicator monitors job creation (and therefore business growth) by tracking the number of workers in the U.S., minus agriculture workers, private household employees, unpaid family workers in family businesses, workers on unpaid leave, and the unincorporated self-employed. The workers included in this metric represent approximately 80% of the country’s GDP.
Employment
NBER relies on the U.S. Bureau of Labor Statistics’ Consumer Population Survey (also known as the household survey) to track overall employment. It’s a broader number than the nonfarm payrolls metric, as it factors in most of the workers that nonfarm payrolls excludes. You can learn about the differences between nonfarm payrolls and general employment metrics here.
Manufacturing And Trade Inventories And Sales
This indicator tallies the combined changes in sales and end-of-month inventories for retailers, wholesalers, and manufacturers. It tells us if production in the U.S. is increasing or decreasing and how consumer demand is trending.
Industrial Production Index
The industrial production index measures the output and capacity of our country’s heavy-duty industrial sector, which includes manufacturing, mining, and electric and gas utilities. Capacity utilization rates in these sectors are another good indicator of demand.
So, Should I Move My Money?
In terms of investing, oftentimes your best move during a recession or Wall Street downturn is to not do anything at all. Investing is a long game and those who are willing to ride out the ups and downs of the market and the economy are usually the winners in the end.
However, that’s not to say you should ignore your total financial picture. We recommend meeting with your advisor, at minimum, once a year to optimize your finances around longer-term shifts in the economy. If you’re nearing retirement or in retirement, it’s wise to meet with your advisor more frequently as economic swings can have a greater impact on your financial health.
Regardless of what stage of life you’re in, a good financial advisor should be proactively alerting you to economic/market trends that may impact you. At Advent Partners, for example, we release a weekly market update video to make sure our clients have an educated and pragmatic understanding of the latest market conditions.
Advent Partners is Here to Help
If you’re still unsure of what your financial future holds, make time to talk to our Certified Financial Planners now. Our approach to financial planning is designed to help you achieve long-term peace of mind while also amplifying your ability to do good for others, no matter what the economic conditions may be.
Download our Recession & Market Correction Checklist
This checklist covers all the what-ifs you need to consider in a downturn, from your cash flow to your IRA.
Sources:
The material presented includes information and opinions provided by a party not related to Thrivent Advisor Network. It has been obtained from sources deemed reliable; but no independent verification has been made, nor is its accuracy or completeness guaranteed. The opinions expressed may not necessarily represent those of Thrivent Advisor Network or its affiliates. They are provided solely for information purposes and are not to be construed as solicitations or offers to buy or sell any products, securities, or services. They also do not include all fees or expenses that may be incurred by investing in specific products. Past performance is no guarantee of future results.
Investments will fluctuate and when redeemed may be worth more or less than when originally invested. You cannot invest directly in an index. The opinions expressed are subject to change as subsequent conditions vary. Thrivent Advisor Network and its affiliates accept no liability for loss or damage of any kind arising from the use of this information. Investment advisory services are offered through Thrivent Advisor Network, LLC, a registered investment adviser. This material, in and of itself, does not create an investment advisory relationship subject to the Investment Advisers Act of 1940.
The purpose of the report is to illustrate how accepted financial and estate planning principles may improve your current situation. The term “plan” or “planning,” when used within this report, does not imply that a recommendation has been made to implement one or more financial plans or make a particular investment. You should use this Report to help you focus on the factors that are most important to you. Review the Financial Planning Disclosure Document and the Financial Planning Agreement for a full description of the services offered and fees.
Investment advisory services offered through Thrivent Advisor Network, LLC., (herein referred to as “TAN”), a registered investment adviser. Clients will separately engage an unaffiliated broker-dealer or custodian to safeguard their investment advisory assets. Review the Thrivent Advisor Network Financial Planning and Consulting Services, Investment Management Services (Non-Wrap) and Wrap-Fee Program brochures (Form ADV Part 2A and 2A Appendix 1 brochures) for a full description of services, fees and expenses, available at Thriventadvisornetwork.com. Thrivent Advisor Network, LLC’s Advisory Persons may also be registered representatives of a broker-dealer to offer securities products.
Advisory Persons of Thrivent Advisor Network provide advisory services under a “doing business as” name or may have their own legal business entities. However, advisory services are engaged exclusively through Thrivent Advisor Network, LLC, a registered investment adviser. Advent Partners and Thrivent Advisor Network, LLC are not affiliated companies. Information in this message is for the intended recipient[s] only. Please visit our website www.adventpartnersfp.com for important disclosures.
Securities offered through Thrivent Investment Management Inc. (“TIMI”), member FINRA and SIPC, and a subsidiary of Thrivent, the marketing name for Thrivent Financial for Lutherans. Thrivent.com/disclosures. TIMI and (Advisory Team) are not affiliated companies.
NOTICE: This explanation is provided for informational purposes only and is not to be construed as or considered to be legal or tax advice. You should always consult your tax advisor with any and all questions regarding any all tax and tax-related matters, including any questions that you may have concerning tax strategies described generally above. Thrivent Advisor Network and its advisory persons do not provide legal, accounting, or tax advice. Consult your attorney or tax professional. Representatives have general knowledge of the Social Security tenets. For complete details on your situation, contact the Social Security Administration.
