facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
In the Markets Now - The S&P 500 vs. Recessions Thumbnail

In the Markets Now - The S&P 500 vs. Recessions

(Baird’s Ross Mayfield wrote the following piece in late July 2022)

THE S&P 500 VS. RECESSIONS

During 2020, I was most often asked, “why is the stock market doing so well when the economy is doing so poorly?” A fair question. By the time Q2 GDP was announced on July 30, 2020 – a historic 33% drop – the S&P 500 was only 4% below its all-time high. From there, it would rally 16% into year-end, even though Covid-19 vaccine data was not published until November. 

So why the discrepancy? Because ultimately, stocks are always looking forward, while economic data looks backward; the stock market and the economy will never line up one-for-one. While economists are improving at utilizing real-time indicators, most economic data takes time to collect, parse, and report. It reflects what has happened – not what will happen. For example, GDP is a quarter’s worth of information, but the final reading is not reported until months later, resulting in a major lag. It is still useful information, of course, but it is simply looking in a different direction than the market. Stock prices, on the other hand, are forward-looking, the culmination of tens of thousands of investors staring at the horizon, evaluating the landscape, and discounting their read on the future back to the present.

The result is that market activity and economic data – including recession timing – will almost never line up perfectly. In fact, as we show in the chart below, the stock market often peaks well in advance of recession, and almost always bottoms before the recession ends. This fits with data from an earlier “In the markets now” note highlighting the strength of average returns 1, 3, and 5 years out from the beginning of a recession – by the time a recession begins, a lot of pain is already priced into the stock market.



Perhaps the biggest takeaway is that sustained market rallies often begin when the economic picture is at its worst and have usually bounced considerably by the time of the proverbial “all-clear.” It also means that an S&P 500 that was down 24% in June – 9th worst selloff of the last 75 years – has priced in a lot of future bad news (e.g., recession). The exact timing can vary widely, but the basic relationship is worth remembering as recession talk ramps up.

As always, we are here to listen to and address any concerns you have about the markets or your financial plan

Disclosures
This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

This report does not provide recipients with information or advice that is sufficient on which to base an investment decision. This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should not consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.

For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.

Fixed income yield and equity multiples do not correlate and while they can be used as a general comparison, the investments carry material differences in how they are structured and how they are valued. Both carry unique risks that the other may not.

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

Copyright 2022 Robert W. Baird & Co. Incorporated.