Traders and investors have been terrified this week by the escalation of President Trump’s trade war, with the stock market selling off and a chorus of recession calls emerging. While a recession is a serious economic event that can have far-reaching consequences, it’s also not an inevitability. Various factors can jolt the economy into one, including unexpected events (like pandemics and wars), asset bubbles bursting, or excessive inflation. The post-WWII US has experienced 34 recessions, with the longest spanning 18 months and the most recent two quarters of negative GDP growth that were driven by the COVID-19 pandemic.
The onset of a recession is typically characterized by declining consumer spending, slowing business investment, and higher unemployment and interest rates. Rising interest rates increase mortgage and credit card interest rates, which in turn eats into consumer spending. In addition, higher rates discourage businesses from hiring and investing, leading to job cuts and more unemployment. As a result, many families become more cautious about making purchases out of fear of losing their jobs. The result is a downward cycle that can be hard to break out of.
This week, Google searches for “recession” reached a peak not seen since the COVID-19 pandemic, reflecting mounting fears over the prospect of a prolonged downturn. Recession fears can also be reflected in other general fear proxies like the VIX and other market volatility measures. Simpler’s traders monitor these and other indicators to track when Recession fears begin to take hold and then adjust their strategies accordingly.