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When is a recession not a recession?

How about right now?

Investopedia defines a recession as follows: “A significant, widespread and prolonged downturn in economic activity. A popular rule of thumb is that two consecutive quarters of decline in gross domestic product (GDP) constitute a recession.”

By that indicator, the U.S. is already there. According to figures released last week, the American economy contracted 0.6 per cent in the second quarter. That came on top of a 1.6 per cent decline in the first quarter, thus meeting the classic recession definition.

Canada, which usually catches pneumonia when the U.S. sneezes, isn’t there yet. Growth in this country is still in positive territory, although for how long is anyone’s guess.

U.S. recession deniers point to the country’s low unemployment rate and more than 11 million job vacancies, among other mitigating factors. But many of those jobs are in the low-paying, high turnover hospitality industry, while others require skills not widely available.

Other positive indicators include last Friday’s announcement that U.S. personal spending increased 0.4 per cent in August from July, beating market forecasts of 0.2 per cent. American consumers are a major driver of the U.S. economy, so any uptick in spending is welcome.

Whether or not the U.S. is in a recession, technical or otherwise, its economy, and that of the entire world, is in rough shape. The September interim report from the Organization for Economic Co-operation and Development says: “Global growth is projected to remain subdued in the second half of 2022, before slowing further in 2023 to an annual growth of just 2.2 per cent.”

The world economy is facing many headwinds, including inflation, rising interest rates, supply chain problems and the lingering effects of COVID. Widespread lockdowns in China along with weakness in that country’s real estate market have slowed growth there to an estimated 3.2 per cent this year.

Russia’s invasion of Ukraine is taking a huge toll on the world economy. “Compared to OECD forecasts from December 2021, before Russia’s aggression against Ukraine, global GDP is now projected to be at least US$2.8-trillion lower in 2023,” the OECD report states. “There are many costs to Russia’s war, but this gives some sense of the worldwide price of the war in terms of economic output.”

The OECD estimate may turn out to be optimistic. If Vladimir Putin introduces nuclear weapons into the Ukraine conflict, the impact on the global economy and world stock markets would likely be cataclysmic. No one wants to contemplate this scenario but, as history has shown, we ignore the threats of dictators at our peril. Mr. Putin has said bluntly: “This is not a bluff.” Cornered animals are driven to reckless acts.

Notwithstanding Monday’s stock market rally, all this suggests a grim autumn ahead for investors. All the major U.S. indexes are in bear market territory (a drop of 20 per cent or more from its high) and are likely to remain there for a while. The S&P/TSX Composite has escaped thus far – it’s in correction mode (a 10 per cent-plus decline). But that’s due solely to its heavy weighting in the energy sector, which is ahead 31.5 per cent year-to-date. Almost every other sector is in the red.

But it won’t last forever. Stocks tend to react months before an economic shift occurs. They start to decline long before a recession hits. And they’ll touch bottom long before it ends. Think back to 2009. The financial world couldn’t have looked bleaker on March 9 of that year. The S&P 500 had fallen 57 per cent since the crash began in 2007 and pessimism reigned.

What happened? The market suddenly turned around and embarked on the longest bull run in history. By 2013, the S&P 500 had recaptured all the losses of the Great Recession.

Barring a disaster, we’ll see the same thing again. On some seemingly inconsequential day during the winter, the markets will touch bottom, and a new bull will start. In the meantime, keep your money in low-risk dividend stocks, short-term guaranteed investment certificates and U.S. dollars.

Also, look at the iShares 0-5 Year TIPS Bond Index ETF (XSTP-T), which I have mentioned before. As of Sept. 30, it was showing a year-to-date gain of 4.1 per cent and a one-year gain of 5.1 per cent. A large portion of that gain is foreign exchange; the fund, which is unhedged, invests in short-term, inflation-protected U.S. Treasuries. But these days, we’ll take profits anywhere we can find them.

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