Fixating on things that don’t matter
By Allan Sloan,
Back in the Middle Ages, when the only media were print and talk, the big question people debated was how many angels could dance on the head (or the point) of a pin. Of course, they never got an answer.
These days, with a 24/7 multimedia mega-wired world and lots of space and airtime waiting to be filled, there’s an obsession with two questions just as unanswerable as angels and pins: “Are we in a recession?” and “Are we in a bear market for stocks?”
Why am I linking these questions together? Because you can’t answer them. And, with all due regard to Thomas Aquinas, who some consider the father of the angels-and-pin question, even if you knew the answer, it’s not helpful.
Let me explain. Sometime down the road, we’ll find out whether we were in a recession today. That’s because a recession isn’t, as many people believe, a six-month decline in inflation-adjusted gross domestic product, known as “real GDP.” Rather, it’s what the Business Cycle Dating Committee, which is part of the National Bureau of Economic Research, decides a recession is. The definition is rather subjective: “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
This stuff becomes clear only in hindsight, which is why the committee, quite rightly, takes its own sweet time to declare that a recession has started or ended. For example, it took until Sept. 20, 2010, for the committee to rule that the economic downturn that had begun in December 2007 had ended in June 2009. And it took until December 2008 to say that the downturn had started the previous December. (See nber.org/cycles for details.)
The committee may well rule next year that a recession started this year. But political considerations aside — Republicans lust for an official “Obama recession” and Democrats fear it — what difference would the announcement make? Will it affect the economy? Nope.
What I do know is that despite the absence of an official recession ruling, things feel crummy and are crummy. What matters isn’t whether we’re in a recession, it’s how to get the economy to create American jobs again. Debating the recession question is fruitless and diverts energy and resources from the real job, which is trying to fix things.
Asking whether we’re in a bear market is even more useless than asking whether we’re in a recession. At least there’s an official, generally accepted definition of what a recession is. That’s not the case with bear markets.
One definition — a decline of 20 percent or more from the previous market peak, using either the Dow Jones industrial average or the Standard & Poor’s 500-stock index as the benchmark — is purely mechanical and can produce ridiculous results. Earlier this month, with stocks lurching wildly, by this 20-percent standard we were in or out of supposed bear territory on an hour-by-hour or minute-by-minute basis. Bear today, gone tomorrow? I mean, come on. That makes no sense.
There’s a more sophisticated definition by Ned Davis Research, which says that a bear market is when the Dow is down 30 percent from its high after 50 calendar days, or down 13 percent after 134 days. From a distance, this is a useful metric, just like the recession definition is. On a day-to-day or hour-to-hour basis, it strikes me as a time waster.
What really matters is whether this is a good time or not a good time to buy and own stocks. Jeff Hirsch of the Stock Trader’s Almanac put out a buy recommendation on Oct. 6, when gloom and doom were rampant, before Monday’s sharp market rise. “The best time to buy is usually when everyone is gloomy,” Hirsch told me. I don’t know if his timing is right — neither does he — but it’s a better way to think than hunting bears and recessions.
I don’t know whether this is a good or bad time to be in stocks, and I certainly have no idea whether we’re in a recession. Oh, well. I guess it’s time to get a microscope and some pins, and start looking for dancing angels.