The equity markets have never had such a bad start to the year as in 2022. The situation could also worsen if a recession actually hits. At least, that is the general expectation. But is it also true that the stock market always performs poorly in times of recession?
There have been thirteen recessions in the US since World War II, including three in the 21st century (2001, 2008, and 2020). In the Netherlands, there were four clear recessions and five mild recessions in the same period.
We define a recession as a situation in which gross domestic product (GDP) shrinks for two quarters in a row. Many experts expect a new recession to come.
Fear of Fed intervention
It is therefore no surprise that investors are currently concerned that the Federal Reserve is intervening too hard to cope with high inflation. The ipo instacart stocks is found online.
The US benchmark S&P 500 briefly entered a bear market last month on concerns about high inflation and rising interest rates.
“Historically, when inflation is high and the Federal Reserve is doing everything it can to address this problem, a recession happens more often than not,” Moody’s chief economist Mark Zandi told Forbes. He estimates the chance of a recession in the next two years at 50%.
The stock markets often remain quite good
But how does the stock market actually perform during such a period when the economy is shrinking? Equity markets are generally still holding up quite well. Surprisingly enough, the S&P 500 rose on average by 1% in all recessions since 1945. This is because stock markets often peak well before a recession and bottom out before the recession is over.
In other words: for the equity markets, the worst period is over faster than for the rest of the economy. In almost every case, the S&P 500 bottomed about four months before the end of a recession, while the peak is often reached seven months before a recession starts.
The past four recessions since 1990, however, paint a somewhat different picture, with the S&P 500 down an average of 8.8%. However, positive returns have been seen in more than half of the 13 recession years since World War II.
“A fall in the stock markets has traditionally been a signal to most investors that a recession is coming,” CFRA Research strategist Sam Stovall told Forbes. “When a recession actually starts, investors see it as a good time to get back into the market.”
Various economists are hoping for a soft landing like in 1994. A soft landing is a situation in which the central bank manages to bring down inflation without a recession following.
In 1994, the Federal Reserve raised interest rates seven times in thirteen months. Although the stock markets were under pressure that year, the central bank managed to prevent a recession, resulting in a 34% recovery in 1995.