Why Fisher Investments Canada Thinks Investors Shouldn’t Wait on Recession Arbiters

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Recession—a broad decline in economic output—is a term Fisher Investments Canada sees often in financial publications. Commentators we follow frequently discuss whether economies are in one, out of one or on the verge of one. But what is a recession? How do you know when one starts and ends? Who decides? In our view, understanding the lengthy process involved in recessions’ official determinations shows why waiting on such affirmation is unnecessary for equity investors—and can actually be detrimental.

Whilst many commentators we follow define recession as at least two consecutive quarters of shrinking gross domestic product (GDP)—a government-produced measure of economic output—official definitions can be more complex. They also vary amongst arbiters. The Centre for Economic Policy Research’s (CEPR) Euro Area Business Cycle Dating Committee—an independent group that dates eurozone economic cycles—says recessions usually involve two straight quarterly GDP declines, but not always.[i] In America, the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee broadly defines a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months—though its determination that 2020′s US recession ran from February to April proves exceptions exist.[ii] Canadian recession arbiter C.D. Howe Business Cycle Council considers a recession a pronounced, persistent, and pervasive decline in aggregate economic activity, which lasts at least one quarter but often more.[iii] Besides GDP, these groups also review other information, including employment, business investment, personal consumption and industrial production, in making their determinations.[iv]

Because it takes time to compile and assess data, these economic cycle dating groups may take many months before declaring recessions’ starts and ends, Fisher Investments Canada’s research has found. Consider: On 31 March 2009, CEPR’s dating committee announced a eurozone recession had started in Q1 2008.[v] That downturn ended in Q2 2009, which the committee declared on 4 October 2010.[vi] Similarly, NBER’s dating committee said on 1 December 2008 that a US recession had begun in December 2007.[vii] It ended in June 2009—which the committee announced on 20 September 2010, some 15 months later.[viii]

That recession showed why recession arbiters take their time and review more data than just GDP. For example, America’s Bureau of Economic Analysis (BEA) reported Q1 2008 GDP rose versus the prior quarter—and the statistics agency twice revised that estimate upward.[ix] Given Q2 2008 GDP increased, many commentators we followed assumed the recession did not begin until Q3 2008.[x] BEA revisions showing Q1 2008 GDP actually contracted didn’t arrive until 31 July 2009.[xi]

The dramatic 2020 economic shock due to COVID-related shutdowns made for quicker—but still lagging—recession calls. C.D. Howe’s council announced on 1 May 2020 that Canada’s economy had peaked in February and entered recession.[xii] In June, NBER said the US economy had done the same.[xiii] On 29 September 2020, CEPR’s dating committee announced the eurozone economy hit a recession in Q1.[xiv] NBER was the first to declare its region’s recession over, saying April 2020 marked a trough in US economic activity. That verdict came on 19 July—of 2021.[xv]

The lag times in official recession calls mean such announcements are usually little help to investors, in Fisher Investments Canada’s view. Why? Because equities are forward-looking, anticipating the economic future 3 to 30 months in advance, according to our research. From their 19 February 2020 high through their 18 March 2020 low, eurozone equities plunged -38.1% as they priced in the severe economic downturn due to sudden COVID lockdowns.[xvi] When CEPR’s dating committee officially confirmed a eurozone recession had started, shares were up 36.9% from their March low—they had already anticipated the economic recovery and moved on, in our view.[xvii]

Another example: In America, US equities peaked on 9 October 2007, a couple months before recession began.[xviii] By NBER’s 1 December 2008 confirmation of the contraction, US equities had already plunged -41.7%.[xix] Similarly, by its 20 September 2010 declaration that the recession was over, US equities had surged 70.2% off their 9 March 2009 low.[xx] Investors waiting on absolute recession clarity may have made poor buy and sell decisions, in our view.

Whilst headlines we see often harp on backward-looking economic data and analysis, overemphasising the past can be detrimental to investors given markets’ forward-looking nature, in Fisher Investments Canada’s view. We think equity investors fare best when they focus on where the economy is headed—not where it has been.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

This content was produced by Fisher Investments Canada. The Globe and Mail was not involved in its creation.