Recession

A recession is a broad decline in economic activity that lasts for an extended period. The most commonly used definition is two consecutive quarters of negative GDP growth, though official declarations (at least in the U.S.) consider a wider range of factors, including employment, income, and industrial production.

Recession vs. bear market

These two terms often get used interchangeably, but they describe different things. A bear market is about stock prices falling 20% or more. A recession is about the broader economy shrinking. They sometimes happen at the same time, but not always. Stocks can enter a bear market without a recession, and recessions can occur without a full bear market.

How often do they happen?

In Canada and the U.S., recessions have historically occurred roughly every 7 to 10 years, though the timing is unpredictable. Some are short and mild (a few months of slower activity), while others are deep and prolonged. The 2008 financial crisis was a severe recession that took years to fully recover from. The 2020 recession was technically the sharpest GDP decline in modern history, but it was also one of the shortest.

What it means for investors

Recessions tend to come with job losses, lower consumer spending, and general uncertainty. For investors, the key thing to know is that recessions are temporary. Every recession in modern history has eventually ended, and markets have recovered. That doesn’t make living through one easy, but it does mean reacting to a recession by selling everything has historically been the wrong call.

A concrete example

During the 2020 recession, the S&P/TSX Composite dropped about 37% from its February peak to its March low. A $100,000 portfolio would have briefly been worth roughly $63,000. By August of the same year, the index had recovered most of the loss, and by early 2021 it had hit new highs. An investor who sold at the bottom locked in a $37,000 loss. An investor who held on saw their $100,000 come back and then some.