August 10, 2023 | macro-economic research report

Research Report: Rolling Recession?

BY: Richard Croft
Imagine a business cycle where twists and turns rotate through sectors of the economy like a game of musical chairs. Only in this game, one chair is replaced by another, turning the traditional game of musical chairs into a never-ending game where no players are left behind. A never-ending game of musical chairs is the blueprint for a rolling recession.


Imagine a business cycle where twists and turns rotate through sectors of the economy like a game of musical chairs. Only in this game, one chair is replaced by another, turning the traditional game of musical chairs into a never-ending game where no players are left behind.

A never-ending game of musical chairs is the blueprint for a rolling recession. Unlike the hard-landing garden variety downturn, rolling recessions cause short-term dents in the pocketbook without draining it. The road to recovery is quicker as negative emphasis shifts to positive sentiment as economic headwinds take aim at another sector.

A rolling recession describes an environment where various sectors incur financial downturns at different times. After those sectors recover, the slowdown “rolls” to other areas. For example, we are seeing a slowdown and lower prices in the energy, commodity, and financial service sectors while witnessing surges in transportation, hospitality, and technology. In a typical recession, mass layoffs cause a ripple effect that impacts most sectors at the same time.

The resiliency in the labour market supports the rolling recession thesis and the fact that it has dumbfounded economists probably explains why they have constantly shifted their timeline for the economy to slow.

This would not be the first time we have been exposed to a rolling recession. In the 1960s, the US automobile industry was globalized, hurting domestic auto sales and production. The recession lasted 10 months, GDP declined about 2.4% and unemployment hovered around 7%. However, cumulative GDP almost doubled after this brief slowdown.

Another example was 2016 when the US dollar surged causing a slowdown in US exports as trading partners were unable to afford higher prices for American products. The manufacturing sector slowed, and rising commodity prices decreased agricultural margins and oil prices. However, other sectors, such as housing and technology, were not affected.

Determining where we are in the business cycle is important because it has implications for central bank policy. The Fed’s objective is to slow inflation while plotting a course towards a soft landing. If we are already in a recession, engaging in further rate hikes for longer, may be doing more harm than good.

Fortunately, if enough sectors remain buoyant, it could head off a deep recession despite higher for longer interest rate targets. Although it does beg the question: when is a recession not a recession? If that feels like a trick question, the answer – when it is rolling – is problematic.

The traditional explanation espoused by the National Bureau of Economic Research (NBER) is that a recession is a significant decline in economic activity spread across the economy lasting for more than a few months.

That definition does not fit the template for a rolling recession as the overall economy never experiences a downward spiral. In the current environment, we think that may be what we are witnessing. We believe the resilient labor market will allow laid-off workers to find new employment in other sectors. We also think that the constant motion of a rolling recession will ward off a large-scale stock market crash which rules out any negative impact on the nation’s wealth effect.

We’ve seen some evidence supporting the rolling recession thesis as economic weak spots rotate through various sectors like a light switch at a disco party. Housing was the first domino to fall. In the early stages of the pandemic, property values welled up supported by cheap money and demand from Millennials who wanted to take advantage of the work-from-home paradigm. When the Fed began tightening in March 2022, property values plunged as rising interest rates caused an affordability crunch that dampened demand. Through the remainder of 2022, the number of existing homes that changed hands receded for eleven straight months. By the end of 2022, existing home prices had declined 34% from 2021 levels which was the first year-over-year decline since 2009.

The slowdown in existing home sales crossed over into new home construction which declined from September through December 2022. By the end of 2022, new home construction in the US had fallen 26.6% from 2021 levels. By 2023, sales of existing homes began to rebound although not as much as one would expect as a dearth of supply limited the number of transactions. To pick up the slack, we began to see an upswing in permit applications for new home construction.

At the same time, manufacturing began to slow as consumer spending receded. Consumers were simply spending more of their disposable income on staples like energy and groceries. That resulted in a five-month slowdown as consumer spending waned and demand faded for US exports.

The tech sector laid off thousands of workers in late 2022 and early 2023 as the industry began to normalize after a hiring binge during the pandemic. Technology behemoths like Amazon and Meta expanded their workforce during the pandemic when demand was peaking. As demand normalized these companies began right sizing their workforce and with the mass adoption of generative artificial intelligence, it is unlikely these displaced workers will be re-hired.

Cushioning this transition was a tight labor market that provided other non-tech job opportunities. It also provided a foundation for more entrepreneurial tech workers to launch startups. So far in 2023, we have witnessed an unprecedented surge in the establishment of tech startups that created more than 75,000 new jobs. These unicorns have been instrumental in advancing artificial intelligence, blockchain, cloud computing, and other emerging technologies. Startups ranged from software development companies to fintech disruptors, healthcare innovators, and renewable energy pioneers.

Normal vs. Rolling Recession

A typical (normal) recession is fallout resulting from a major event. Notable examples include the rising interest rate environment in the 1970s, subdued consumer confidence that accompanied wage and price controls under President Nixon, inflationary spikes during the early 1980s under President Reagan, a stock market crash like 1929 that caused the Great Depression and more recently the 2008 collapse of sub-prime mortgages that threatened the entire banking system.

Rolling recessions are more complicated and often go unnoticed because they are caused by smaller events that result in a domino effect across various industries. For example, in the early stages of the pandemic, the service sector was shuttered, and profits collapsed. At the same time demand for goods surged because of shelter-at-home restrictions and remote work policies. Profits exploded for online merchants. Post-pandemic, as macro-economic trends began to normalize, demand for services expanded while activity for goods producers and online retailers began to wane.

Higher prices lead to higher interest rates that make it harder to borrow and finance loans. The rising cost of money makes it more difficult for consumers to buy big ticket items and businesses to finance inventory and expansion plans. Note the downturn of the housing market and business investment.

Reduced spending leads to decreased demand for both services and goods, affecting business revenue. The lower demand then causes cutbacks in production, so businesses hire less and may also decrease the number of employees. Because businesses are also looking for ways to lower expenses in an inflationary environment, cutbacks in hours worked, eventually leading to employee cutbacks as wages are one of the largest expenditures. When spending goes down, inflation starts to decrease. If the interest rates are too high and the economy slows down too much, a recession begins.

And The Band Plays On…

The normal versus rolling recession debate has been front and center for the last six months as industries have been exposed to more economic twists than a contortionist in a circus performance. Questions abound given squeezed profit margins, reservations about whether cost cutting initiatives will be viewed as rightsizing or downsizing, foundational assessments about how much of the increased cost of production can be passed on to consumers?

Interestingly, these issues so far seem to be sector specific. The overall North American economy continues to expand. Consumers spending persists, despite higher prices. Where we are seeing contractions is within sectors most acutely impacted by interest rates. These intermittent shockwaves crisscrossing industries in our view, augments the rolling recession thesis.

As for inflation, there is a train of thought that President Biden’s early efforts to stimulate the economy with climate change initiatives and technology incentives designed to produce more high-end semi-conductors domestically, may have propelled the initial surge in prices. It likely also provided the foundation underpinning the robust labor market.

More importantly, as recession angst winds its way through the economy, inflation seems to be abating. The July reading on the Consumer Price Index published by the US Bureau of Labor Statistics confirmed month-over-month inflation rose by only 0.2%, with the year-over-year number coming in at 3.4%. The largest contributor to this price increase was housing, while nearly half of other monthly use items, such as gasoline, food, and natural gas, declined. Is it possible that Uncle Joe’s version of “Bidennomics” worked? Clearly, that debate will rage through the 2024 presidential election cycle.

Even with higher inflation, some industries have seen growth. For example, spending on travel has increased sharply as noted in the most recent record quarterly earnings from Delta. The pent-up demand leftover from the pandemic has also been a tailwind for the service sector as seen in data from Visa and Mastercard.

The bottom line is that economists are still unsure if the U.S. will hit a soft or hard recession in 2023; however, more signs seem to support the rolling recession hypothesis.

What Are the Implications of a Rolling Recession?

Some areas of the economy remain strong and could head off an outright recession and help the job market stay buoyant. Unfortunately, a robust labor market is a two-edged sword. Based on minutes from the US Federal Open Market Committee (FOMC), officials believe the tight jobs market is a major contributor to inflation which means we will likely see higher rates for longer.

Economists remain split on what that means for the economy. In one economists’ survey, almost two-thirds of respondents said a global recession was likely in 2023, while a third of respondents said it was unlikely, showing how unclear the outlook is.

US Federal Reserve Chair Jerome Powell told Congress in July that the US economy “slowed significantly last year” but even here, the data is mixed.

Consumer spending appears to be expanding at a solid pace, but other indicators point to subdued growth of consumer spending and expansion plans for business. According to Fed Chair Jerome Powell, “activity in the housing sector continues to weaken, largely reflecting higher mortgage rates. Higher interest rates and slower output growth also appear to be weighing on business fixed investment.”

Offsetting that, as mentioned, is the historically low 3.5% unemployment rate. Bottom line: the key to further Fed tightening will be determined by officials viewing bifurcated economic data. Notes Powell, “we will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation.” Hardly a reassuring message!

What About The 1%?

A sidebar to this discussion is that affluent Americans aren’t suffering, particularly considering the robust tech sector that has propelled the Nasdaq and S&P 500 indices higher. Yet it’s also true that the bulk of high-profile job losses that began last year have been concentrated in higher-paying professions. That pattern is different from what typically happens in recessions: Lower-paying jobs, in areas like restaurants and retail, are usually the first to be lost and often in depressingly large numbers.

That’s because in most downturns, as Americans start to pull back on spending, restaurants, hotels, and retailers lay off waves of workers. As fewer people buy homes, many construction workers are thrown out of work. Sales of high-priced manufactured goods, such as cars and appliances, tend to fall, leading to job losses at factories.

This time, so far, it hasn’t happened that way. Restaurants, bars, and hotels are still hiring – in fact, they have been a major driver of job gains. And to the surprise of labor market experts, construction companies are also still adding workers despite higher borrowing rates, which often discourage residential and commercial building.

Instead, layoffs have been striking mainly white collar and professional occupations. Uber Technologies recently said that it would cut 200 of its recruiters. GrubHub announced 400 layoffs among the delivery company’s corporate jobs. Financial and media companies are also struggling, with Citibank well on its way to shedding 1,600 workers as part of its “right-sizing” initiative.

Economists believe that many of the affected employees are well-educated and will likely find new jobs relatively quickly. Right now, for example, the federal government, as well as employers in the hotel, retail and even railroad industries are seeking to hire people who have been laid off from the tech giants.

Tom Barkin, president of the Federal Reserve Bank of Richmond, notes that affluent workers typically have savings they can draw upon after losing a job, enabling them to keep spending and fueling the economy. For that reason, Barkin suggested, white collar job losses don’t tend to weaken consumer spending as much as losses experienced by blue collar workers do.

If we are in fact witnessing a rolling recession, it will have major implications for the stock market. Sector rotation becomes the optimum strategy as sectors succumb to the vagaries of recession angst. Industries like travel, hospitality, and retail might suffer, while technology, healthcare, or essential goods remain resilient. As a result, stock prices of companies in negatively affected sectors will likely decline, while stocks in more resilient sectors might continue to perform well or even rise. Think about that in terms of the performance of the broad US stock market as measured by the S&P 500 index which has been propelled by the so-called “magnificent seven.”

Whether the stock market continues to climb will depend in large measure on investor sentiment. If investors believe in the long-term growth prospects for the economy, the sectors that have lagged will play catch up to the stocks that have outperformed. If, however, investors fall prey to fear and uncertainty, it could lead to broad-based selloffs causing a decline in stock prices across a larger swath of sectors. So far, that has not occurred, but we are mindful of negative seasonal trends in August and September.

If we accept the rolling recession thesis, then company fundamentals and their ability to grow earnings will be paramount. We have just completed second quarter earnings – typically the weakest quarter – that while not stellar, were better than expected. Companies with strong balance sheets, low debt, and robust cash flows which are the hallmark of the magnificent seven, are better positioned to weather economic challenges.

Government interventions, such as stimulus packages and monetary policies, can impact stock prices during a rolling recession. Supportive measures aimed at specific sectors – note as we said, green energy, and domestication of semi-conductor manufacturing – will boost investor confidence and contribute to price gains in those areas.

Expectations about how long a rolling recession will last also matter. If investors believe that the impact on specific sectors will be short-lived, it can be seen as a buying opportunity. Since the end of the first quarter of 2023, that strategy has permeated investor strategy.

However, if sentiment shifts to the view that we will see a prolonged recession because of say, continued tightening by central banks throwing a wrench into the rolling recession thesis, it could cause further downside pressure on stock prices.


Imagine you are coaching a professional hockey team and after a mediocre season, upper management decides to carry out a performance review. That can be a frightening prospect since past results are important and if not addressed, can be determinative. It depends on whether management views history as a signpost that promotes a path forward based on tactical tweaks or a hitching post that makes strategic modifications problematic. The outcome of the performance hinges on how well the coach frames the path forward.

It’s not that different for portfolio managers who must do a postmortem on past investment decisions under the glare of the benchmarking spotlight. Three questions emerge when doing portfolio reviews; 1) is the portfolio manager and client on the same page in terms of strategy, 2) is the benchmark providing an apple-to-apple comparable and 3) is the portfolio’s performance being measured on return metrics or within a well-defined risk / return matrix?

Performance reviews are much like what you would see on America’s Got Talent. Under the spotlight, one of the judges asks some questions to lighten the mood. It doesn’t work. You are sweating profusely as the audience awaits the first note of the song you have chosen to sing. That’s pretty much how your portfolio managers feel when they put their investment portfolio under the benchmarking spotlight.

Benchmarking is a standardized way of measuring the performance of a security or in our case, a diversified collection of securities, that make up a portfolio. The benchmark is like the control group in a drug trial. It serves as a guide to evaluate whether the investment strategy is delivering satisfactory results.

However, it only provides insight into the success or failure of a strategy if the portfolio manager and client are of the same mind in terms of risk tolerance and financial objectives. For example, our enhanced income mandate is more volatile than the Real World (RWI) Income Benchmark, but it generates more tax-advantaged cash flow.

For clients who require greater income during retirement the ability to generate additional cash flow reduces the need to sell securities to meet the client’s required income. If the cash flow remains constant and generates some growth (i.e., dividend increases) to that income stream, the enhanced income mandate is more likely to provide some inflation protection.

The securities in the benchmark (the RWI Income index[1]) may also provide some inflation protection but the probability of doing so is less than what the client would get within the enhanced income mandate. Above average income and inflation protection are the cornerstones of the enhanced strategy and for it to work long-term the client and portfolio manager must be cognizant of the limitations associated with a clients’ income objectives and risk tolerance.

The inflation protection component morphs into the comparable paradigm. Quality companies with a long history of increasing dividends, provide a measure of income stability and inflation protection that is not necessarily reflected in year-to-year gyrations of the constituent security’s share price. In that sense, the RWI Income Index may not accurately reflect the value of the augmented cash flow provided by an enhanced income mandate (i.e., the apple-to-apple comparison).

The final consideration comes down to risk adjusted return. The concept is akin to a financial tightrope where balancing your investments is like a daredevil on a unicycle. On one side you have the catch-of-the-day which in stock market lexicon are the story stocks driven by momentum. There is the possibility that you could generate great returns but there is also a chance that you could suffer downside variability that leaves you feeling like you just got slapped by a wet fish. The trick is to find a happy medium where a more appropriate portfolio fits somewhere between those exhilarating high-wire gains and an ultra-conservative approach that is less thrilling than a meeting of your mother’s book club.

When we talk about risk adjusted return, we are grading the performance of a diversified collection of securities against a backdrop of the portfolio’s variability. In short, what level of risk was assumed in the pursuit of above-average returns. If a high return was propelled by excessive risk that may not represent the best outcome when compared to modest returns with low risk. Adjusting for risk attempts to quantify the underlying value of the performance.

The objective is to balance risk and reward so that returns are commensurate with the implicit risk. We evaluate investment options with an eye towards finding the most favorable trade-off between risk and reward. Over the long term, understanding risk-adjusted return helps us make well-informed decisions about the suitability of investments in relation to the client’s financial goals and risk tolerance.

Measuring Risk-Adjusted Return

There are several mathematical applications to measure risk-adjusted return including:

The Sharpe Ratio:

The Sharpe Ratio was developed by famed Nobel laureate William F. Sharpe. This calculation assumes that investors, quite correctly, are risk averse. The baseline for any investment strategy is the risk-free rate of return represented by US Treasuries which, Fitch rating aside, stands at about 4.5%. The Sharpe Ratio takes that into account by measuring portfolio returns that exceed the risk-free rate on a per unit of risk as defined by the standard deviation of the portfolio. Note that the risk-free rate of return assumes a zero-standard deviation. The formula inputs are as follows:

Sharpe Ratio = (Rp – Rf) / σp


Rp = Expected portfolio return

Rf = Risk-free rate (typically the return on a government bond)

σp = Standard deviation of the portfolio’s returns

A higher Sharpe Ratio indicates better risk-adjusted returns, as it reflects greater excess returns per unit of risk.

Sortino Ratio:

The Sortino Ratio effectively fine tunes the Sharpe Ratio by focusing on downside risk rather than overall volatility. The logic is that investors are not concerned about upside variability as only moves to the downside have a negative impact on one’s pocketbook. The Sortino Ratio considers only the standard deviation of negative returns (downside deviation) when calculating risk-adjusted returns.

The formula is as follows:

Sortino Ratio = (Rp – Rf) / σd


σd = Downside deviation

The Sortino Ratio is particularly useful for investors who are more concerned about avoiding losses than the overall volatility of their investments.

Treynor Ratio:

The Treynor Ratio, named after Jack L. Treynor, assumes a diversified portfolio is sensitive to systemic market movements. Systemic risk assumes the markets are subjected to constant ebbs and flows, with black swans lurking in the background subjecting investors to unpredictable financial disasters with the veracity of a hyper-active jack-in-the-box.

Investment management 101 tells us that a well-diversified portfolio can control risks associated with specific companies or sectors but cannot mitigate systemic risk linked to market failures. Systemic risk is analogous to the rise and fall of ocean tides that raises and lowers all boats.

The best we can hope for is to manage beta which measures a portfolio’s susceptibility to systemic risk. The Treynor Ratio takes beta into account using the following inputs:

Treynor Ratio = (Rp – Rf) / βp


βp = Beta of the portfolio

The Treynor Ratio is particularly relevant when evaluating portfolios that are sensitive to systematic market movements.

Treynor’s position is that one should not look at returns in a vacuum. The objective is to adjust the portfolio’s performance and the benchmark’s return for risk. That allows us to ascertain whether the portfolio is performing in line with expectations. And those expectations must be tied to the symbiotic relationship between the portfolio manager and the client.

The role of a benchmark is to provide a sounding board that allows the client and portfolio manager to review long-term objectives within a well-thought-out financial plan that includes a matrix tied to tax issues created when securities are bought and sold. It is the core element in the investment plan which is the cornerstone of the financial plan.

[1] For additional information of the Croft Benchmarks, go to

Richard Croft, Chairman & CIO

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