Recession is trending, Could ‘People’s Worries’ Bring Bad News For the Economy?

Trends are powerful and often, they become self-fulfilling prophecies. The success of a song, story, or a play and how successful it will eventually become depends a lot on initial few reactions. If they are favourable, more people get attracted and that, in turn, brings in further interest from the people. And when something is seen as doing well, people with unfavourable view become silent and fans become more and more vocal. There is always a pressure on humans to conform to society and majority opinion does influence almost all of us. Most of us look for ‘approval’ from friends and peer groups, and this changes our thought process. We don’t want to be seen as someone who does not comply.

When we look at google trends, it is a fairly reliable indicator of what people are talking about, what they are feeling worried about and what their concerns are. The chart above shows the frequency of google search for the keyword “recession” from 2004 onward. It has hit the 2008-2009 levels recently. Of course, there has been a significant dip from the peak levels afterwards, but still the number of people searching for the word ‘recession’ remains at a higher level than observed in the past ten years. This is a significant change because such spikes could actually precede the real event.

Can this become the cause of recession? Just because people are searching for it, would the probability of a global recession in next twelve to eighteen months become higher than normal levels? We have seen that humans are not solely driven by hard data and they are not always 100% logical in their decisions. For them, sentiment plays a key role. If people are getting more concerned about possibilities of a recession (of course, we can debate over this inference drawn on the basis of more Google searches), the possibilities of them cutting down on consumption and getting more pessimistic about future outlook are more likely scenarios than them getting exuberant about near term future.

This is important for investment decisions because such large-scale events will impact all countries, all sectors and all the stocks. Effectively, no one is immune to these adverse developments. With more data points available on different facets of a company and better analytical tools available at their disposal for analysts and fund managers, both good and bad things can develop very quickly. Hence, the role of sentiment is of significant importance for money managers.

In some of our earlier posts, we have discussed how sentiment plays a big role in shaping our reality. If we apply the same principle here and see this situation, we will find that with each passing day, recession is becoming “overdue” if we track the frequency since the time of Great Depression. One doesn’t wish for it to happen soon but it is also a fact that the more it gets delayed, more painful it would become. If we can forecast its timing with reasonable accuracy, it can help us combat it. The effectiveness of remedial measures will depend on the timing. Too early, you waste them and too late, they become ineffective. Any indicator including Google Trends is welcome if it can help us in getting the timing right and that would be no mean task.

Research Team
EM Alpha LLC


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