The US’s plummeting GDP has been a concern recently. In a hyper-globalised world, the repercussions of negative economic growth are not limited to one nation. There is now talk of a global recession in the coming years. The US T-bill market witnessed the worst period in history in 1H 2022. However, this has not stopped the stock markets from bouncing back. It is, however, somewhat puzzling when stock markets do not reflect actual sentiment.
Signs of hope amid chaos
The US’s GDP fell 1.6% in 1Q 2022, followed by a 0.6% reduction in 2Q. Two consecutive quarters of decline in real GDP could mark a recession, but there are other parameters to consider as well, such as a decline in real income, a rise in the unemployment rate, a decline in consumer spending and stagnation of industrial production.
The unemployment rate is a crucial indicator of recession. However, the US labour market remains strong. It added over 528,000 jobs in July alone, according to the latest reports, double the number expected. Job reports also showed an increase in wage growth from June to July. Other positive indicators include the drop in the price of WTI crude oil to below USD90 a barrel, which reduced the national average cost of gasoline to about USD4.14 a gallon from around USD5 a gallon.
Through the lens of history
Understanding the correlation between stock market performance and recessions is essential, although it may be difficult to determine how strongly they are correlated. A practical way to do this is by assessing the performance of stock markets during previous recessionary periods. Many private wealth management services conduct in-depth historical analysis.
The S&P 500 index is a good representation of the stock markets. It tracks the 500 largest publicly listed companies on US stock exchanges. There have been 10 recessions since the S&P 500 index was established in 1957.
The Great Recession started in December 2007 and continued until mid-2009. The S&P 500 index declined by 55% of its peak value in March 2009. This was an extraordinary scenario. However, the average decline in the index during post-World War 2 recessions is around 29%. This is still steeper than the median decline of 24% observed during post-World War 2 recessions.
The lowest decline observed during a recession was around 20% in 1990. This recession lasted only eight months. Two crucial inferences can be made from the S&P’s historical data on stock performance during a recession. First, in most cases, the index declined before recessions were officially declared. Many recessions are predictable, and informed investors are proactive with their decisions. The index could also decline due to risk aversion of many investors. Second, the stock markets witnessed a steep recovery before the recession officially ended. This reflects the forward-looking mentality of investors and the bandwagon effect.
Understanding the contradiction
Historical data shows the stock markets always plummet before the recession is official and bounce back before it is about to end. However, recent developments in the stock markets are unusual. The markets have rebounded despite widespread talk of an imminent recession. This is contradictory to the relationship between the economy and recessions. It can be challenging to find the right investment opportunities in such uncertain times, and it is best to opt for private wealth management services to navigate them.
It is important to note, however, that many believe the US economy is not in a recession and will not be going into one soon. Strong labour market conditions and consumer spending have boosted investor morale, making them re-evaluate their concerns. As a result, the markets have rebounded after a second consecutive quarterly decline in real GDP. Historical data shows investors are optimistic about stock market performance after a second consecutive quarterly decline in real GDP. They believe the worst is behind them and it is time for a rebound. This explains the current stage of market rebound despite the recession obsession.