Last Updated on July 28, 2026
Overview – Investors and Their Obsession With Recessions
If there’s one word that stirs a flurry of emotion among investors, it’s “recession”.
For some investors, it invokes feelings of worry and dread, while others hear it and think of the abundant opportunities waiting to be scooped up. Because of this incredibly mixed reception, one of the most persistent questions among some investors is “When will the next recession occur?”
This question is deceptively simple, since the answer to it (assuming it can be found, more on this later) and its subsequent implications are very significant. Therefore, it comes as little surprise that some investors literally lose sleep over trying to answer it.
Although trying to predict recessions sounds like a smart thing to do, in reality, it’s usually fraught with multiple problems and ultimately may fail to provide the benefits that some investors originally hoped for.
Different People Have Different Definitions of a “Recession”
One of the very first problems that investors run into when trying to predict when recessions will happen is clearly defining what exactly a “recession” is.
A very, very broad definition that most people and institutions abide by is “A decline in economic activity.” However, this broad definition offers very little practical utility because it fails to specify how to measure “decline” and what falls under the umbrella of “economic activity”.
At the national level, some countries follow a so-called “two-quarter” rule: if their economy experiences two back-to-back quarters (i.e., six consecutive months) of declining GDP growth, then it is officially in a recession.
However, more holistic definitions of a recession consider GDP figures while also accounting for other variables such as changes in unemployment levels, industrial output, and benchmark interest rates.
When it comes to individual investors, chances are the definitions they provide will also vary widely based on their personal values. What an institutional investor defines as a recession may differ greatly from how a retail investor sees it.
Although there are various ways of defining what recessions are, the lack of a clear, unified, and unambiguous definition is the first hurdle.
The Primary Challenges: Knowing When a Recession Will “Start” and “End”
Assuming an investor has settled on a definition of “recession” they like, which is already a major hurdle, they will quickly run into even more daunting challenges, and that is figuring out when recessions officially “start” and “end”.
This may sound like a trivial matter, but based on the definition a given investor decides to go with, that may not prove to be the case in practice.
For example, imagine an investor defines a recession as “A prolonged period of weak financial markets and general economic decline”. They expand on this definition by measuring “financial market weakness” by looking at major market indices and “general economic decline” by looking at unemployment numbers, GDP data, and changes in benchmark interest rates.
This definition is certainly comprehensive, but even a definition like this will still face challenges when determining when recessions officially start and end.
If market indices have consistently dropped over the past six weeks, is it time to officially say a recession has started? According to the above definition, yes, but how far do market indices need to decline for it to be considered severe enough to enter recession territory? Are six weeks and dozens of index points lost considered long and steep enough to say financial markets are indeed on a sustained, downward trajectory and not just a temporary slump?
Additionally, what if financial markets are weak, but economic data otherwise remains strong (or vice versa)? As we’ve discussed before, the economy and financial markets are linked, but only to varying degrees. Can a recession really be declared if market indices are down, yet the job market remains strong, and GDP growth stays steady?
Once the challenge of confidently determining when a recession officially starts is solved, investors will now be confronted with knowing when a recession is officially “over”.
How much do financial markets need to recover before investors say they have returned to normal? Is 0.1% growth in a country’s quarterly GDP enough to say the country has weathered the storm, or is more robust growth needed? Or, what if financial markets are experiencing a strong rebound but a country’s macroeconomic indicators (GDP growth, employment, interest rates) show no improvement?
Many people, including investors, have a good idea of what a recession constitutes, but trying to predict when they will happen (and subsequently, end) is almost always fraught with all kinds of difficulties.
A Case Study of Trying to Predict Recessions
To demonstrate just how difficult it is to predict them, let’s look back at 2022 – 2023. During this time, two major events happened. In February 2022, Russia invaded Ukraine and started the Russo-Ukrainian War. Then, in March 2023, three US banks collapsed in less than a week.
We won’t go over the details of each event. Still, the gist of it is this: soon after the Russo-Ukrainian War erupted, the world experienced a very sharp increase in inflation, driven primarily by very high oil prices. This rapid increase in inflation and the uncertainty caused by the war made many people and institutions start wondering if a recession was imminent.
Then, the market turmoil caused by the March 2023 US bank failures again ignited recession fears, with Canadian banks in particular increasing their provision for credit losses (PCLs) in anticipation of weaker economic activity. Fears of a recession in Canada were further reinforced by worse-than-expected inflation data and a further increase in bank PCLs.
Throughout 2022 and 2023, the word “recession” was constantly being thrown around, yet no reputable authority formally declared that the world was officially experiencing one. For those who insisted that the world was, in fact, now facing a recession, they had no answer when asked when it was expected to end.
In hindsight, it’s debatable whether a true global “recession” occurred during that period, but the amount of time, energy, effort, and stress spent on trying to predict when this hypothetical event would start and end is a clear demonstration of what we discussed previously: the immense difficulty of trying to accurately predict when recessions will occur and cease.
Knowing How to Adapt to Recessions Is Better Than Trying to Predict Them
By now, it should be clear that expending significant resources trying to predict recessions is largely an exercise in futility. So, instead of trying to predict when the next recession(s) will happen, investors are better off knowing how to adapt to them when they arrive.
In practical terms, this means knowing how to quickly pick up new, pertinent information and knowing when (or when not) to take decisive action.
For example, many investors try to anticipate when the next recession will happen to try and “buy the dip” (which, as we’ve discussed before, isn’t always a great idea). Instead of stressing over when the “dip” will occur, investors are better off preparing for the possibility of the price of a given investment suddenly dropping one day and quickly scooping it up.
Imagine a given stock’s price has hovered around $80 for the past 12 months. You’ve analyzed it to be a worthwhile investment, but while the $80 tag is a bit too high for your liking, you have sufficient funds on hand to purchase it at a more attractive price.
Then, one week, a series of events causes the stock’s price to tumble to $60, which is what you’ve determined to be close enough to its intrinsic (true) value. Because you have the funds on hand and have already done your analysis, you quickly scoop it up. You never explicitly tried to predict when the “dip” would, if ever, occur, but you were prepared to act quickly if it did.
No matter how smart or insightful a given investor is, they do not have clairvoyance. Although complex financial modelling, in-depth predictions, and other tools give the illusion of foresight, none of them truly do. Trying to predict when the next recession will strike is no different.
Instead, knowing how to think quickly and act swiftly in the face of sudden, unexpected circumstances will prove to be significantly more valuable.
Wrapping Up
Many investors spend significant time and resources trying to predict when future recessions will occur. Although this may seem like a worthwhile endeavour, doing so is almost always fraught with all sorts of challenges and difficulties.
Clearly defining what a “recession” is, confidently saying when one starts, and declaring when it officially ends all sound simple enough, but in practice is a very difficult task that demands a lot of resources but only gives an uneasy sense of assurance in return.
Instead of trying to create an infallible crystal ball, investors are much better off maintaining a constant state of readiness for sudden, unexpected changes. Knowing how to think and act quickly in the face of rapid change is a far more valuable skill than trying to predict the future with near-perfect accuracy.
