SignalFrogA recession is a decline in economic output across several quarters. For investors the definition matters less than the lag: by the time a recession is officially established, its start regularly lies months in the past.
The lag is the point
Establishing it requires data, and data takes time. In the United States a committee of the NBER does the dating, and it dates retrospectively — sometimes more than a year after the actual turning point.
Equity markets do not wait for that. They price expectations, not history. Historically, declines therefore typically began before the official start of a recession, and recoveries often set in while economic data was still poor.
What is visible earlier
Several measures move before output itself: the yield curve, credit spreads on riskier bonds, purchasing manager indices, initial jobless claims.
None of them is reliable enough to build on alone. Each has produced false signals. Their value lies in the fact that they rarely err at the same time.
What this means in practice
A recession is not a reason to rebuild a long-term portfolio — it is too poorly forecastable and too often already priced in. It is a reason to check whether the money needed in the short term sits where a downturn cannot reach it.