A recession is a meaningful, broad decline in economic activity. Markets often fall before and during one — but the relationship is messier than it sounds.
A recession is a significant, widespread and prolonged downturn in economic activity. A common shorthand is two consecutive quarters of shrinking GDP, but in the U.S. the National Bureau of Economic Research officially declares recessions using a broader set of measures including jobs, income and spending.
Recessions usually bring rising unemployment, falling profits and lower consumer spending, which often pressures stock prices. But the stock market is forward-looking: it frequently falls before a recession is confirmed and starts recovering before the economy does. That's why trying to time entry and exit around recessions is notoriously difficult.
Recessions are a normal, recurring part of the economic cycle, and expansions have historically lasted far longer than downturns. Long-term diversified investors who stay the course have generally come out ahead, even though individual recessions are painful. See what causes a market crash for the sharper, faster version of a downturn.
Practice risk-free: apply this idea with $10,000 of play money in the stock market simulator — no sign-up, no real risk.
The popular “two negative quarters of GDP” shorthand is not the official U.S. rule. The National Bureau of Economic Research (NBER) dates recessions using a broad mix of indicators — real income, employment, industrial production and spending. By its records, post-World War II U.S. recessions have averaged roughly 10–11 months. Two recent extremes make the point:
| Recession | NBER dates | Length |
|---|---|---|
| Great Recession | Dec 2007 – Jun 2009 | 18 months |
| COVID-19 recession | Feb 2020 – Apr 2020 | 2 months (shortest on record) |
Stocks are forward-looking. In 2020 the S&P 500 bottomed in late March — before the recession was even officially declared — and was climbing while unemployment was still near its worst. That is why waiting for the “all clear” from the economy usually means missing the recovery. Rising prices erode returns too; see how inflation affects stocks and model it with the inflation calculator.
Not financial advice: this is educational content only, written by site operator Mustafa Bilgic. For authoritative basics see the U.S. SEC at investor.gov and the concept references at Investopedia.
A recession is a significant, broad and prolonged decline in economic activity, often involving falling output, spending and employment.
A common rule of thumb is two consecutive quarters of falling GDP, but in the U.S. the NBER uses a wider range of indicators to declare one.
Recessions often pressure stock prices through falling profits and spending, but markets are forward-looking and frequently move before the economy does.
Yes. Recessions are a recurring part of the economic cycle, though expansions have historically lasted much longer than downturns.