Recession Officially Began December 2007

The National Bureau of Economic Research (NBER) today announced that the current recession began in December 2007.  The media tend to report many different definitions of what a recession is (e.g. two consecutive quarters of negative GDP growth), so it is helpful to note the NBER’s definition:

A recession is 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. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.

I found this portion of the NBER’s statement most revealing about the current situation:

Payroll employment, the number of filled jobs in the economy based on the Bureau of Labor Statistics’ large survey of employers, reached a peak in December 2007 and has declined in every month since then. An alternative measure of employment, measured by the BLS’s household survey, reached a peak in November 2007, declined early in 2008, expanded temporarily in April to a level below its November 2007 peak, and has declined in every month since April 2008.

I am sure we will see the usual market bottom-callers come out in the wake of this report because, usually, there is such a lag between the official announcement of a recession that the economy may already on its way back by the time the announcement arrives.  Thus, the bottom-callers say, this is the time to buy equities.  But look again at the quote from the NBER statement above—employment has been in decline for a year, and as we know from recent reports, that decline is only accelerating.  Also, given that housing is not near a bottom, how can anyone recommend buying stocks except for a very short-term trade?

Consider the recent market rally in which the S&P 500 gained nearly 20 percent.  In a post in mid-November, I had suggested that the market was ready for a bear market rally of that size that would last until year end – that is, a 20 percent rise over the course of 4 to 5 weeks.  Instead, the rally occurred over a mere 5 days!  This is why I believe that for all but the most intrepid investors working with market-timing models, now is a good time to exit the market and move into fixed income investments.