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What Is A Recession, Are We In One & Should You Buy Penny Stocks?

What is a recession, are we in a recession, and should you buy penny stocks during a recession?

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What Is A Recession?

What happens during a recession? A recession is two consecutive quarters of negative GDP growth. It could also be considered a contracting economy with slowing consumption, less production, and higher unemployment. Thanks to the latest string of Consumer Price Index (CPI) and Producer Price Index (PPI), data traders and investors are beginning to throw the term “recession” around.

The latest details from the June Fed Meeting and FOMC press conference revealed more glaring information about the magnitude of inflation. As a result, the Federal Reserve bumped interest rates by 75 basis points, one of the largest jumps in decades. “We anticipate that ongoing rate increases will be appropriate,” Powell said.

“By this point, we had actually expected to see clear signs of at least inflation flattening out…The environment has become more difficult, clearly, in the last four or five months, and hence the need for the policy actions we took today [6/15/2022].”

Are We In A Recession?

At this point, from a technical perspective, we are not in a recession (yet). But that doesn’t mean it won’t be the case later this year or next year. Unemployment is still low, and wages continue growing. However, with rising costs like record fuel prices, wage growth has been negated in some instances. There’s no getting around the fact that inflation is hitting everyone. It lowers the average standard of living by forcing higher spending on fewer goods.

But inflation isn’t the same as a recession as some main factors are wage growth and jobs. The latest round-up of jobless claims put June 10th figures at 229,000 against the backdrop of an expected 215,000. Meanwhile, the last reading was 229,000. Continuing claims for June 3rd came in at 1.321 million compared to estimates of 1.302 million. The previous reading was 1.317 million.

Housing data has also been eyed, and new data this month shows a glaring slowdown in the market. US housing starts for May came in at 1.549 million compared to 1.7 million expected. The last reading was 1.724 million. On top of this, mortgage rates reached 5.78%, according to Freddie Mac. Rates for 30-year fixed mortgages hit their highest levels since 2008.

While we may not be in a technical recession, economic data suggests that there is pain being felt by consumers right now. The exact details on whether or not we’re heading into a recession will likely come next month. On July 28th, before the opening bell, the Bureau of Economic Analysis releases an advance estimate of second-quarter GDP results. If overall economic production declined, we should get the official answer. GDP dipped 1.5% during the year’s first quarter and was worse than analysts expected. A second quarter of negative growth would put us into a “technical” recession.

What Are Analysts Saying About A Recession In 2022?

The current outlook is mixed as to whether or not we’re firmly in a recession. Some expected that to come early next year. Meanwhile, others are reading the latest data and expect one much sooner. This is thanks, in part, to the hawkish stance on rates from the Fed as well as what was revealed from the latest CPI report.

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Everything from food to energy increased in price. Meanwhile, the index for fuel oil more than doubled, rising 106.7%. This was the most significant increase in the history of the series, which dates to 1935. The food at home index rose 11.9% over the last 12 months and was the largest 12-month increase since the period ending April 1979.

Mike Wilson, Chief Investment Officer at Morgan Stanley, weighed in on a recent interview. Wilson said that the Fed’s latest move “doesn’t really change our intermediate-term view, unfortunately. I don’t think this is going to solve the inflation problem overnight…It also raises the risk of a recession, because you’re bringing rate hikes forward even faster. The Fed is hiking into a slowdown, and they don’t really have a lot of options.”

Recession Is “Virtually Certain”

Other people like Michael Yoshikami, founder and CEO of Destination Wealth Management, expect a recession is imminent. Yoshikami discussed his stance this month, saying that the Fed’s latest move means they’re “going to take any action necessary to stem inflation.”

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He also explained that “the problem we’re going to have here is are they going to tip the economy into recession when the consumer is already starting to pull back?… I think it’s a virtual certainty that we’re going to go into recession next quarter.”

Yoshikami also expressed that the pending recession might not be entire “doom and gloom” for the longer-term outlook. He explained, “There is a belief that if we raise enough – let’s say we raise by 75 [basis points] and then we raise by another 75 – then if there is a problem in the economy, if it’s a shallower recession, which I suspect it would be in the third quarter, the Fed actually has some room now to come back off of some of those rate increases.”

Should You Buy Penny Stocks During A Recession?

Whether there’s a larger stock market crash in 2022, a recession, higher inflation, or a massive explosion to all-time highs, it may come secondary to the overall market for penny stocks. That’s because they tend to move disconnected from broader trends. Are there exceptions to this? Of course, but over the last week alone, we’ve seen massive rallies in plenty of stocks under $5. Meanwhile, markets continue to hit new lows.

Companies like Sidus Space Inc. (NASDAQ: SIDU), AeroClean Technologies (NASDAQ: AERC), Advent Technologies (NASDAQ: ADN), Acorda Therapeutics (NASDAQ: ACOR), Akanda Corp. (NASDAQ: AKAN), and many others have all experienced explosive sessions.

When it comes to a recession and penny stocks, the thing to remember is that momentum and volatility play a big role. No matter what the markets are doing, you’re sure to find at least a few top penny stocks making extreme moves that may last a day or multiple weeks.

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By J. Samuel

As a trader and expert finance writer, I enjoy finding new and emerging trends that may have been overlooked by the average masses. If there's one thing that a trader or investor wants to know, it's how to use valuable data to their advantage. My expertise is in uncovering this data and compiling it into actionable information. As a professional finance writer, I've contributed to many of the top finance platforms and pride myself on researching factual, publicly available information and using that in all of my articles.

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