ECRI: “U.S.heading into a recession”

The U.S. is heading into a recession and “there’s nothing that policymakers can do to head it off.”  That’s what the Economic Cycle Research Institute (ECRI), a respected economic forecasting firm, announced last week. The ECRI has a good record when it comes to predicting recessions.  They’ve not triggered a false alarm in 20 years and they’ve correctly predicted the last three recessions.  The ECRI also correctly forecast that the economic slowdown in 2010 would result in a “soft landing” and not a double-dip recession. In short, when the ECRI makes an official recession call it’s worth taking note.  Here’s what they say:

It’s important to understand that recession doesn’t mean a bad economy – we’ve had that for years now. It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar. Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.

Scary stuff.  But how do stock markets fare in recessions?  The table below shows the performance of the S&P 500 Index during each post-WWII recession: From the top, in April (about 100 days ago) the S&P 500 is currently down about 18%. Compare that with an average decline during a recession of 24% and an average duration of 340 days.  However, there’s a great deal of variability in the nature of stock market declines during recessions.  Some market sell-offs are short and shallow, some are long and deep.  If a recession is on the cards only time will tell which type the market is in for.

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