Freaking Out About A Recession? We Got Your Back

Given the stock market’s movements this week (and the financial media’s subsequent panic) we thought it would be helpful to answer some questions we got in our Facebook group and Instagram here. Consider this your guide to current market conditions, and save it for later so you can feel prepared for the next time investors get spooked.

Are we in a recession?
Nope! A recession occurs when the economy contracts for more than two quarters. A recession is measured using several indicators, which include real gross domestic product (GDP), income, employment, manufacturing and retail sales.

Other terms, including market correction, a bear market and a stock market crash, are used interchangeably with the term recession, but they shouldn’t be.

A market correction occurs when the overall market falls 10 percent. It can also be applied to individual stocks.

Meanwhile, a bear market occurs when there’s a 20 percent drop in share prices over at least a two-month period. Related: if you can’t keep bear and bull markets straight, think about how the two animals attack. A bear often stands up over its victim, punching down. Thus, a bear market is falling. Meanwhile, a bull uses its horns to push up against the victim, lifting them in the air. A bull market works similarly.

A stock market crash, like the ones in 2008 during the Recession and in 1929 before the Great Depression, is a sudden steep drop in stock prices. Think 20 percent over a week, rather than a few months.

What does the yield curve mean? Why do we care that it inverted?
Okay, so the yield curve measures how bond investors are feeling about risk. It’s typically a more legitimate way to track how the market is doing than stock prices because the bond market is larger, and because bond investors are a bit more intentional about what they do than stock investors.

When the yield curve inverts, long-term (10-year) bonds have yields, also called returns, that are lower than short-term (2-year) bonds. Check out this writing metaphor, or this sports analogy, for a more detailed explanation.

We care that a yield curve inverts because it has often indicated that a recession is on its way.

And why are stock prices going down?
Stock prices fell about three percent on Wednesday, then stabilized on Thursday. Investors are concerned about the ongoing trade war between the United States and China, among other issues.

What other indicators do people watch?
Some folks watch the VIX, or the volatility index. When it goes up, it means there is more volatility, or uncertainty, in the market. On Wednesday, as stock prices fell, the VIX was up nearly 30 percent.

Why does it feel like everyone is talking about a recession?
Well, they are! I work in financial media, and I can attest to the fact that reporters and our sources alike have been talking about when the next recession would happen since at least 2015 (folks who have been in the field longer than me say it goes back as far as 2012). Quite frankly, media folks and investors alike have been terrified that another 2008 would happen (although the next economic contraction likely won’t be as serious). As a result, both jump at any signal that the markets are turning.

Okay, so we’re not in a recession. But eventually, we will be. What should I do to protect myself and my family?
First, don’t panic! If a recession happens, you can do a few things. First, when it comes to your investments, you’ll likely be best served to do nothing, especially if you’re investing for the long term. Remember that when you sell investments, they are subject to taxes.

Consider refinancing your mortgage or student loans now, because it is often easier to do prior to a recession than during it. Remember that every situation is different though, and you may not find this necessary.

Finally, look at beefing up your emergency fund. The way most folks are hardest hit during a recession is that they lose their jobs. Make sure you have extra liquid cash, and keep that resume up to date, just in case.

Got memes?
We love a good finance meme. These two are great for the recession panickers among us.