Recession

A recession is a broad-based decline in economic activity that affects employment, industrial production, consumer spending, and business investment. While the popular shorthand is "two consecutive quarters of negative GDP growth," the National Bureau of Economic Research (NBER) — the official arbiter — uses a more nuanced definition involving depth, diffusion, and duration of the decline.

Recessions are a normal part of the economic cycle. The US has experienced roughly 12 recessions since World War II, with the average recession lasting about 10 months. However, some are mild (2001's lasted 8 months with a shallow decline) while others are severe (2007-2009's Great Recession lasted 18 months).

The impact on investments varies by recession severity. During the average recession, the S&P 500 declines about 30%. However, stock markets are forward-looking — they often begin declining before the recession starts (as the market anticipates the downturn) and begin recovering before the recession ends (as the market anticipates recovery).

Personal financial impacts of recessions include: job losses (unemployment typically rises 2-5 percentage points), income reduction (fewer hours, lower bonuses), home value declines, business revenue drops, and difficulty accessing credit. Having an emergency fund, manageable debt, and diversified income sources provides resilience.

For investors, recessions create some of the best long-term buying opportunities. The years immediately following recessions have historically produced some of the strongest stock market returns. Dollar-cost averaging through a recession, rather than selling in fear, has been one of the most reliable wealth-building behaviors.