Most recessions are the result of fiscal tightening following periods of high growth and inflation, with the Federal Reserve raising overnight rates to put the brakes on the economy.
A second common cause of a recession is the collapse of a group of businesses or assets due to lousy management resulting in a financial contagion. The Savings and Loan Crisis and the real estate bubble and sub-prime mortgage of the Great Recession are examples.
The third type of recession is an event-driven collapse of investor and consumer confidence leading to massive selling of stocks, reduction in spending, and eventually a business slowdown and employee layoffs.
When it comes to event-driven market selloffs and recessions, it is essential to understand that, historically, when the event is waning, the markets have already begun to rebound.
Here is a look back on Recessions since WWII, and S&P 500 performance during those recessions, showing not all recessions are created equal.
