A recession is a significant decline in economic activity, lasting more than a few months. But many asked, when to buy stocks? How to better time a market entry in a recession? Well, here are 3 points to guide you along.
This post was originally posted here. The writer, Royston Tan is a veteran community member and blogger on InvestingNote, with username known as Royston_Tan and has 22 followers.
For those looking to time a market entry, some data points on when might be a good time.
WHEN TO BUY STOCKS IN A RECESSION? THE IDEAL TIME TO PICK A BOTTOM
While I don’t recommend trying to time stock purchases with a crystal ball in front of you, especially during a bear market potentially as severe as the one we are currently facing, I will provide some reference point as to when might be the IDEAL time to PICK a bottom and start investing more aggressively in a recession.
This is not going to be from my GUT but instead using historical statistics to time entry. YES, I know that historical performance is never representative of the future trajectory of the stock market, especially one that is seemingly unprecedented as the current one.
Then again, having some maths behind you beats randomly pulling out some FORECAST based on your gut.
Before I disclose “my formula” on when to buy stocks in a recession, the question I like to ask is: Are we already in a recession? Seems to be a no-brainer question especially with more than half the world being on lockdown, right?
WHAT DEFINES A RECESSION?
A recession is a significant decline in economic activity, lasting more than a few months. There is a drop in the following 5 economic indicators:
- Real Gross domestic product (GDP)
- Retail Sales
The current situation seems to tick all the boxes in this category.
A “simpler” definition for a recession is when the GDP growth rate is negative for two consecutive quarters or more. While it might seem simple, there might be some confusion. Should we be measuring GDP growth on a YoY basis (ie compare 1Q20 to 1Q19) or should we be measuring it based on QoQ (ie comparing 1Q20 to 4Q19).
The latter comparing on a QoQ basis is often being termed as a “Technical Recession” within the Singapore context (If you type technical recession in Google, most of the results are related to Singapore).
HOW DOES THE US CALCULATE GDP GROWTH?
In the US, the Bureau of Economic Analysis uses real GDP to measure the US GDP growth rate. Real GDP takes out the effect of inflation. GDP is calculated every quarter but is being annualized. The aim of annualizing is to remove the effect of seasons. If the BEA did not do this, there will always be a spike in the 4Q growth rate due to the holiday seasons.
The BEA provides a formula for calculating the US GDP growth rate which I will not detail much in this article.
IS THE US ALREADY IN A RECESSION?
Depending on which article you read, some might say that the US is already in a recession while others such as this Bloomberg Tracker (last updated March 11) which pegs the probability at “only” 53%, still the highest level since GFC. However, that tracker was done before the jobless claims blew up over the past 2 weeks, now more than 10m, so I reckon that probability ratio will probably be inched up significantly in the next update.
Given the COVID-19 scenario that we are facing, whether we choose to look at GDP growth from a YoY or QoQ basis, it is difficult to argue against the fact that US GDP growth will be negative in 1Q20 and 2Q20.
Even if the COVID-19 issue miraculously resolves itself today, the uncertainty surrounding a possible relapse will result in nations all over the world engaging a protectionist stance that will stymie the global economic recovery process.
My best guess, if I am to look into my crystal ball is that the peak of the COVID-19 issue for developed nations such as US, Italy and Spain will probably be sometime in late-April to early-May by which the focus will then turn to developing nations such as India and Indonesia where cases are just beginning to ramp up.
Developed nations will continue to shut off their borders to foreigners for fear of a relapse, just like what China is currently doing. The V-shape recovery which many people are hoping for is probably not going to happen in such a scenario.
HOW BAD IS THIS RECESSION GOING TO BE? …
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