You probably heard it today. It’s official now. The U.S is in a recession. In fact, the U.S. has been in a recession since December of last year according to the National Bureau of Economic Research (NBER) report released today. Many people believe a recession is two consecutive quarter of negative GDP, which hasn’t happened yet. However, that is just a rough guide.  National Bureau of Economic Research’s decision to call a recession makes it an official recession. They look at lots of other factors in addition to the GDP.

This is hardly a news to most of us. It is hard for anyone to not realize the current economic slowdown. Even if you do not follow stock market, the daily news of companies laying off workers and familiar neighborhood stores and restaurants closing doors, clearly indicates the worsening economic situation.

The stock market reacted pretty badly to the announcement. The major indexes were down sharply. The Dow Jones Industrial Average was down 7.7%. NASDAQ and S&P 500 were both down almost 9%. Everyone knew this was coming, but the main concern now is how long is this going to last.

The last recession (dotcom bust of 2001) lasted less than a year according to the NBER’s historical data. Recessions usually do not last too long. May be a year at the most, which means by the end of this year we should be out of it. But experts predict this recession will last longer than the previous ones. This CNN Money article has experts saying the recession will last at least till the end of second quarter of 2009. How would the stock market behave till then?

I read some time ago that the stock market goes down in a fear of recession, rather than the recession itself. In other words, stock market have already factored in this recession. That is why the S&P 500 is at 800 instead of 1500. Then why did it go down 8 or 9 percent today? This is probably because of the profit-taking from previous 5 days of gains when S&P 500 gained 19.11%. Even after today’s drop, the S&P 500 is still 8% higher than the close on Nov. 20, when it closed at 752.44, it’s lowest close since 1997!

Stock market usually starts to pick up in the middle of a recession. Stock market will have already climbed much higher by the time NBER announces official end to a recession. Therefore, I believe that this is a good time to buy and build a diversified portfolio. The market will still be volatile, but if it goes up another 19% it may not come back down again.