It’s official. The National Bureau of Economic Research (NBER) decided to declare the obvious yesterday. After a record 128 months of expansion, the economy officially entered a recession in February.
The NBER is the arbiter of when and if our country is in a recession and they define it as a “decline in economic activity that lasts more than a few months.” The widely held definition of a recession that most investors hold is 2 negative quarters of GDP contraction…which we will likely get. The NBER usually takes over a year to look at economic data before declaring a recession. This time, well, it didn’t take that long.
And what did the market do as a result of this official declaration? It was positive on the day! In fact, the S&P 500 turned positive for the year, and the tech heavy NASDAQ set a record high!
So, why do stocks go up? I mean, the economic fallout from the pandemic is still being felt. And while the economy is slowly reopening, economic data is putrid, at best. Well, the short answer is: In the long run, stock prices are the world’s way of appraising the enduring values of the underlying companies. The market is saying the worst is behind us. These companies will survive, they will thrive. The USA is not going out of business and neither are the best run businesses in the world.
Stock prices will ebb and flow with current news and investor sentiment. But in the long run, the advancing prices and resulting wealth of investing in good businesses, remains unbroken.