RECESSION ALERT: The FED Just Crashed The Stock Market

Welp, I thought this is going to be a normal day. As I woke up, opened my computer, took a sip of coffee, expected to get more recommendations on Johnny Depp's trial, and was immediately hit by the headline: GDP fell by 1.4 percent, leading to the concerns that, wait a second, maybe we're in a recession.

Like, now, today, after all the usual signs are all there. Just three weeks ago, we saw the inverted yield curve, that's correctly predicted nine recessions since 1955. Out of the last 13 rate height cycles, 10 of them came right before a recession. And now if we have one more negative quarter of growth, it will be confirmed. Not to mention, if inflation stays high while spending continues to decrease, we could end up seeing a relatively unheard of term that has not been around since the 1970s, and that would be stagflation.

So, of course, we got to break this down, talk about what just happened, the potential impact for not only yourself, but also the entire economy, and then what you could do about it. So you're best prepared ahead of time to make the most of the situation. Although, before we start, real talk, if you appreciate all the daily research that goes into making videos like this, it would help me out tremendously if you either hit the like button or subscribe for the YouTube algorithm.

Plus, as a thank you for doing that, here's a picture of a copper band butterfly fish. So thank you guys so much, and also a big thank you to ZipRecruiter for sponsoring this video, but more on that later.

Alright, so first we really got to get this out of the way: what is a recession? Because even though it's easy to imagine the stock market falling into the abyss, unemployment skyrocketing to record highs, and everyone losing their minds that the FED won't keep the money printer going, the reality is a recession is not always catastrophically damaging, and it doesn't always leave you with nothing left over by the time we've recovered.

See, all of this starts with what's known as the GDP, which stands for Gross Domestic Product. This is the entire market value of all the goods and services produced in the United States, and the purpose of the GDP is to measure our economic output. See, if we're growing as a country and when that number goes up, it's telling us that incomes are increasing, people are spending more money, and everything is fine.

But on the other hand, when that number goes down, it tells us that people are spending and producing less; our economy is shrinking, and potentially bad things could happen, like a recession. Technically, if we're getting into the nitty-gritty, a recession is defined as two consecutive quarters of declining GDP, of which we're already halfway there.

Although in terms of how common this is and just how bad things really get, since the 1940s, we've seen 12 recessions, the longest lasting 18 months, the shortest being two months during the COVID shutdown. Since 1900, the average recession tends to last about 10 months, with usually not so good effects. For example, the Great Recession of 2007-2009 was sparked by the collapse of the housing bubble, which sent the stock market tumbling 40 percent.

Several large banks collapsed, and that required an 800 billion dollar stimulus package to recover. Before that, we saw the dot-com recession where the NASDAQ lost 75 of its value. The U.S. grappled with the September 11th attacks, and the collapse of Enron and Swiss Air all occurred around the exact same time.

We also had the Gulf War recession in 1990 when the Federal Reserve had to slowly raise interest rates to keep down inflation, but that slowed down the economy, which took an even bigger hit when Iraq invaded Kuwait, causing the price of oil to skyrocket. Now, the other common factors within previous recessions include rising oil and energy costs, higher interest rates, and a shift in spending after a war. And I mean, come on, that all sounds pretty familiar, right?

But as for whether or not we could see an upcoming recession in the near future, here's what you need to know. For the first time since the pandemic, the GDP declined by an annualized rate of 1.4 percent. So why? Without boring you with all the charts and figures, here's what you need to know because really all of this could be summarized and boiled down to a few main categories.

One, CNN reported that most of the decline was due to a decrease in inventory investment, which was booming in the final months of 2021. Now, as a business owner myself—get your free stock down below in the description when you sign up for Public using the code Graham—this usually happens for a few reasons.

One, it's always a good idea to pre-spend all of your expenses towards the end of the calendar year to reduce your taxable income. And two, when products and services are going up during times of supply chain bottlenecks, quite a few businesses ordered more inventory than they needed, just to make sure that they wouldn't run out. That would explain why we saw the decrease in Q1 of this year.

Two, the economy also saw a decline in spending across states, local, and federal governments, which was likely fueled by the decrease in unemployment insurance, child tax credits, and stimulus. Third, exports declined by 3.2 percent, or in other words, less of our own goods and services were shipped and sold overseas, which could likely be the result of the shutdown in China along with the Russia-Ukraine war.

And fourth, we also saw an 8.5 percent decline in defense spending, which CNBC said knocked a third of a percentage point off the final GDP. As far as what all of this means, the answer is it's all over the place depending on who you ask.

Ben Castleman from The New York Times explains that a negative GDP was the result of inventory and trade, which is disrupted by supply chains and shutdowns. And when you take that out, growth still remains strong. Jason Furman, a professor at Harvard, also went on record to mention that consumption, business investment, and residential investment hadn't increased, suggesting that demand is strong as consumers and businesses are buying a lot.

All of that is to say that as of right now, it's not that big of a deal, but it could also just be the very beginning. And as Bank of America warns, a recession shock could soon be coming. Although the real worry is not so much the declining GDP, but instead the potential for stagflation, which is something that we have not seen since the 1970s.

For those unaware, this refers to the perfect storm of slowing growth, higher interest rates, and rising unemployment all occurring at the exact same time. And like I mentioned, this last happened about 50 years ago. Even though there are many theories on what exactly caused this—including a sudden spike in oil prices, poor economic policies, or the removal of the gold standard—we face similar hurdles today that some people are justifiably worried about.

After all, rising inflation has resulted in the tightening of policies, and with rising costs getting passed on to the business and the consumer, there's a chance that businesses could scale back and lay off their workforce in an effort to prevent prices from rising even higher. And all of a sudden, stagflation could be a possibility.

Although in terms of the overall impact throughout our economy and what this means for the stock market, here's what you need to know because if you just hear this out, it could wind up making you a lot of money.

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Alright, so in terms of how a recession could impact the stock market, here's where things get really interesting. From 1869 through 2018, there have been a total of 16 recessions that have had a positive stock market return. In fact, of those positive recessions, the market went up an average of 9.8 percent during a time the GDP declined by 3 percent.

Or in other words, out of 30 recessions, half of them had absolutely no correlation whatsoever with the stock market. Now to take this a step further, since 1869, one study found that the correlation between GDP growth and stock market returns was nearly zero at 0.05 percent.

And on average, the stock market tends to peak six months before the start of a recession. And that is where we get to some of the bad news. According to a wealth of Common Sense blog, throughout every recession dating back since 1945, the stock market has at some point seen a sell-off, with an average drawdown coming in at a whopping 29.2 percent.

However, the good news is that even though there can be a rather abrupt sell-off, by the time the recession is over, the market recovers and posts an average profit of 1.7 percent, with an average gain of 15.3 percent in the following one year.

Meaning investing during a recession is one of the most profitable times that you could be investing. Not to mention, in the three years following every single recession we have ever had, the market was 100 in the green.

However, as Ben Carlson pointed out, it's not as easy as thinking, "Oh perfect, I'll just invest in the middle of a recession and make a ton of money. It'll be easy," because as he mentions you're not going to know you're in a recession until it's too late. Since technically a recession is defined as two negative periods of GDP growth, we could be in the start part of a recession right now, with one of them already under our belt, and we wouldn't know it for sure for another few months at the very least.

In this case, Secret Market found that most of the time, the market sees peak pain six months prior to a recession because for the most part, the stock market tends to be forward thinking. If anything, Bloomberg notes that a bear market tends to be a better predictor of a recession rather than a recession being a better predictor of a bear market.

Although even though we could very well be in a recession right now and not even know it, there were a few—how should I say—alternative indicators that are worth looking at because this might help point us in the right direction.

CNBC reported on several cues to an upcoming recession you might not be aware of. And the first is what's known as the skyscraper index. In 1999, it was theorized that the completion of skyscrapers tends to cap off what is a large building boom. In 2021, we saw some of the largest towers finishing construction. A real estate analyst with Barclays even said that we took the index as far back as the late 1800s and found that even going back that distance, we could still find correlations between economic crisis and the completion of the world's tallest building.

We also have my personal favorite, the men's underwear index from none other than the former chair of the Federal Reserve, Alan Greenspan. He mentioned that men's underwear is a staple item with predictable stable sales. So if you see a decline in men's underwear sales, it signals that finances are tight, and most likely a recession is coming. But sure enough, this proved correct from 2007 to 2009 as underwear sales fell significantly and then picked back up in 2010.

As far as where we are today on the underwear index, sales are down slightly, but I guess you could say we're getting to the bottom of it. Get it? The bottom… okay, I'll stop.

LSD Lotter also came up with what they call the lipstick index, suggesting that women would spend more on small luxuries like lipstick as pick-me-ups when times are hard.

Although in terms of what I think about this and whether or not any of this is cause for concern, here's what you need to know: even though yes, we did see negative growth; yes, we did see weak earnings in forecasts; and yes, one more negative quarter would confirm a technical recession. When you pay attention to the stock market, you'll notice that the worst tends to come right before a recession is announced, and usually that coincides with being the best time to buy.

Now that is not to say that prices can't go lower, or that a recession can't last way longer than we think, or that maybe this entire thing is just a big fluke false alarm. But based on every other recession in the past, the best course of action is to simply stay invested and keep investing when times are bad, especially if we are in a recession.

Plus, there's also the mindset of if we do see a recession, then maybe that means the Federal Reserve won't raise interest rates as fast as we expect, and that's good. I know it's totally backwards thinking, but right now bad news is good, good news is bad, and nothing makes sense anymore. Just expect that stock market volatility is going to become a lot more common.

It's always a good idea to do your best to stay employed and understand that no recession has ever lasted for longer than 18 months; meaning there is light at the end of the tunnel.

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