Is A Recession The Same As A Bear Market? No, But They Do Have Overlapping Similarities

By John Duffy, CEO of Trending Stocks

As kids we learned a square is a rectangle, but a rectangle is not necessarily a square. The same is true of a bear market and a recession. Most recessions include a bear market, but not all bear markets lead to or include a recession. What’s the difference between a bear market and a recession?

A bear market occurs, when the stock market (as defined by the S&P 500), declines by 20%. The stock market is driven by emotion, and those are two evil twins of "fear" and "greed." Today, we have a third player, "24/7 news." This includes traditional news programming, and also commentary, analysis, podcasts and social media opinions.

Simply, the constant news hype stokes the fear and greed cycle. 

A bear market can impact an individual’s 401K, as well as other retirement and investment programs. It doesn't necessarily take money out of your pocket in the short run, unless you are withdrawing from those programs or about to. A recession, on the other hand, does have a real impact on many people and is more serious than a bear market. 

What drives a recession?

A recession is said to occur when the GDP (Gross Domestic Product), decreases for two consecutive quarters. The GDP is derived from measurable components, including:

Manufacturing: a decrease in new manufacturing orders would indicate a slowdown in the economy.  Employment: a decrease in the number of new hires or an actual decrease in the number of jobs would indicate a slowing economy. Real Income: a decline in real income reduces buying power which negatively impacts retail sales and again would slow the economy. Inflation: the general increase in the price of most if not all goods and services.

Why is the Fed so focused on stopping inflation? The simple answer is, they are fearful it could get out of control. Here is a true story to help better understand what “out of control inflation” looks like.

During my corporate days I was at dinner with a co-worker from Brazil. I asked him, how was inflation there? He replied, “Oh, not bad, about 5%.” “Wow!” I said, “only 5%. It’s almost that high here.” His reply was, “No, No, my friend, I meant 5% a month; 60% a year!” I responded, “If that’s pretty good, how do you define bad?”

My friend then told a story about a colleague of his who traveled to Chile to buy a car. A Japanese auto maker was offering a 3-year fixed-price loan to entice people to buy. His friend said, when he made his last payment, the amount of that payment would have only bought a pack of cigarettes in Brazil.

I hope that sheds some light on “runaway inflation” and why we do not want it here in the U.S.

The bottom line is: in a recession, people can lose jobs, homes and pay more for most goods and services.

Fortunately, right now, if you had to pick a place to be living related to finances, America is the place.  Seven percent inflation may be high, but it is no match for the 12 to 14% inflation that's impacting much of the world. America is currently energy self-sufficient, while much of Europe is bracing for a potentially difficult winter.  For now, while recession is lurking in the wings, most of us should count our blessings.

Remember, bear markets impact some of us. Recessions impact most of us. Inflation impacts all of us.