Recession

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: A recession is a significant decline in economic activity spread across the economy and lasting more than a few months, typically visible in falling output, employment, income, and spending.

How a recession is defined

A popular rule of thumb says a recession is two consecutive quarters of falling real gross domestic product (GDP). In the United States, however, the official dates of recessions are set by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee. It looks at the depth, diffusion, and duration of the decline using measures such as employment, real income, industrial production, and spending.

The NBER usually announces a recession's start months after it begins, which means the economy can already be in a recession before it is officially recognized.

Common causes of recessions

  • Rising interest rates intended to fight inflation, which slow borrowing and spending.
  • Financial crises, such as banking failures or a collapse in credit and asset prices.
  • Supply shocks, such as a sudden jump in energy prices or a pandemic.
  • Excessive debt and leverage that force households and businesses to cut back.

When weak growth is combined with high inflation, the result is stagflation. A recession can also bring falling prices, or deflation, if demand drops sharply.

Recession and the stock market

Stocks are forward-looking, so markets often fall before a recession is declared and sometimes begin recovering while economic data still looks poor. Many recessions coincide with a bear market, though not every bear market comes with a recession.

Suppose a company earned $4 per share before a downturn and the market valued it at 18 times earnings, or $72. If expected earnings fall to $3 and investors will only pay 14 times earnings, the price could drop to $42, a decline of more than 40%, even though the business survives. This combination of lower earnings and lower valuations explains why recessions can hit stock prices hard.

Recession warning signs investors watch

No single indicator reliably predicts a recession, but economists and investors track several. Rising initial jobless claims, falling manufacturing surveys, weakening consumer spending, and tightening bank lending standards can all signal slowing activity. An inverted yield curve, where short-term Treasury yields exceed long-term yields, has preceded several past US recessions, although its timing has varied considerably. Corporate guidance during earnings season can also reveal whether companies see demand softening. These signals are best viewed together, since any one of them can give false alarms.

Which sectors hold up better

Sectors tied to discretionary spending, such as cyclical stocks, tend to be more sensitive to recessions, while consumer staples, healthcare, and utilities, often grouped as defensive stocks, have historically been less affected because demand for their products is steadier. That is a tendency, not a rule, and any sector can decline in a severe downturn.

Frequently asked questions

Is a recession two quarters of negative GDP?

That is a common rule of thumb, but in the US the official determination is made by the NBER, which considers a broader set of indicators including employment, income, production, and spending.

Do stocks always fall in a recession?

Stocks often decline around recessions, frequently before they start, but the timing and size of the drop vary. Markets have sometimes started rising before a recession ended.

What is the difference between a recession and a depression?

A depression is an unusually severe and prolonged recession. There is no single official threshold, but the term is reserved for very deep, long-lasting downturns.

· All terms A–Z ·

For information only, not investment advice. See the disclaimer.