Thursday, August 4, 2022

If We're in a Recession... So What?

By Enrique Abeyta (View Archive)

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If you pay attention to the financial news like I do, you've probably heard the word 'recession' about 1,000 times in the past week alone...

The media needs a constant stream of topics to talk about, and when they get something as ominous sounding as a recession... they are all over it! They know that we respond to negative stimulus versus positive stimulus at a rate of 8 times to 1...

So, what exactly is a recession?

Well, there is no exact definition. In fact, the whole concept is ambiguous...

In theory, a recession means that the economy is shrinking rather than growing. But how do we measure the economy?

One common measure is to look at gross domestic product ("GDP").

In our case, the last two quarters have been negative quarter over quarter. That is one of the definitions used to define a recession. Here is that chart...

While this is interesting, we're much more interested in what GDP has done year over year. Using that measure, we've actually continued to see growth.

This is what we saw during the COVID-19 crisis and the global financial crisis. Here is that chart...

So while shrinkage in quarter-over-quarter GDP represents a slowdown in growth, it's not nearly as important as the year-over-year result.

The closest thing to an official definition for a recession comes from a little-known nonprofit academic panel known as the National Bureau of Economic Research. On its website, it defines a recession as a "significant decline in economic activity that is spread across the economy and lasts more than a few months."

The committee measures the economy using a range of economic data including GDP, employment, household income, consumer spending, and industrial production.

This is a pretty good list in my opinion. If most of these factors are going negative, then the economy, and almost always the stock market, is in a bad place.

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Where do we stand on these factors right now?

It's a mixed picture.

GDP is down quarter over quarter, but it's still up year over year.

Employment is still growing, and this is the most important factor to me.

Wage increases are growing household income, and we're still seeing healthy consumer spending. Some might argue that inflation is eroding the purchasing power of households, but there's a big difference between being able to purchase less and not being able to purchase at all!

This is the most critical factor in our view.

If employment turns negative, there will be a waterfall of negatives that run through the rest of the economy.

Despite some high-profile layoffs from the (previously overheated) technology sector, we are definitively not seeing a shrinkage in employment. In fact, given the number of unfilled jobs, it's difficult to imagine how we would get to that point any time soon.

So... how much does this matter for your trading or investing strategies?

In some ways, it doesn't matter at all for trading.

Instead of focusing on the macroeconomic environment, you should look at what the stock market is telling you.

Right now, we're in a downtrend. We will remain in that downtrend until we go 100 trading days with the market up.

For trading, that means you should stick to the areas with well-established uptrends (i.e. energy) and be very tactical (only buy very oversold stocks and plan to trade them in the short term) on everything else.

It also doesn't matter for investing strategies with a timeframe of more than 18 months. The best possible way to invest is to buy stocks you think can grow earnings 3 times, 5 times, or 10 times... and then benefit from that growth in the share price.

A reduction in economic growth across the next year – even if it takes the stock market down another 25% and impacts company growth for several quarters – is a nonissue. You should only be worried about a permanent impairment of the fundamental prospects of the companies you're investing in.

Basically, we're saying – who cares whether we're in a recession or not?

If you have the right goals and methodology for your strategy – trading or investing – it really shouldn't matter!

In my Empire Elite Trader service, the doom-and-gloom recession talk hasn't stopped us from consistently finding trading opportunities. In fact, over the past week alone, we've closed seven trades for solid gains – following our strategy of booking quick gains on beaten-down winners who have seen their stocks rebound.

In yesterday's issue, we just found another great setup on a long-term winner that has been punished on investor overreaction... giving us a great opportunity to snatch up shares at a discount. Find out how to get instant access to this brand-new trade right here.


Enrique Abeyta
August 4, 2022

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