The recent market volatility may be the early days of pricing in a less-than-perfect economic landing. The FOMC recognized that the labour market is softening. Our chart this week plots the S&P 500 and the 12-month trailing earnings since 1970.
Historically, earnings always fall in the wake of a recession. There are no exceptions and it’s just the degree and magnitude that needs to be debated. While we cannot time these periods in the business cycle with much precision, we need to understand what may or may not be ahead of us.
Many, including us, were expecting a recession in the wake of the FOMC’s most aggressive tightening cycle in 2023, and it never materialized. We did see earnings flatten out after the post-Covid rally in 2021 and all the recent gains for markets have come on multiple expansion.
Looking forward, the bottom up consensus earnings for the next few years is looking for growth of 10 per cent, 13 per cent, and eight per cent for the next three years. A study of historical recession facts reveals markets are grossly mispriced for the likely earnings path if we are going to get a hard landing.
Stock performance during the COVID-19 recession
Over the course of the COVID-19 recession, which lasted from February to April 2020, the S&P 500 fell 9.99 per cent and the NASDAQ fell 3.28 per cent. Lockdowns, panic buying, and supply chain disruptions around the world brought on the recession and bear market.
During the recession, the S&P 500 fell 33.92 per cent from its highest point during the recession. The NASDAQ fell 30.25 per cent from its recession peak. It took the S&P 500 126 trading days after the end of the recession to recover to its pre-recession level. It took the NASDAQ 76 days. The stock market then went on a record-breaking run until early 2022.
Stock performance during the Great Recession
The S&P 500 fell 37.56 per cent over the course of the Great Recession (December 2007 to June 2009) and the NASDAQ fell 30.95 per cent. During the recession, the S&P 500 fell 55.47 per cent from its highest point within the period. The NASDAQ fell 53.43 per cent from its peak. The Great Recession had a more significant, long-term impact on the stock market than the COVID-19 recession. It took the S&P 500 895 trading days after the end of the recession to recover to its pre-recession level. It took the NASDAQ 373 days.
Stock performance during the early 2000s recession
During the early 2000s recession (March to November 2001), the S&P 500 fell 8.2 per cent and the NASDAQ fell 9.2 per cent. During the recession, the S&P 500 fell 26.43 per cent from its highest point. The NASDAQ fell 39.82 per cent from its peak. The early 2000s recession occurred during the dot-com crash and further strained the already-battered NASDAQ. The dot-com crash saw the NASDAQ lose 78 per cent of its peak value from March 2000 to November 2002.
The 18 months prior to the dot-com crash saw the NASDAQ triple as investors dumped money into companies that had even the loosest connection to the internet. It took the S&P 500 920 trading days after the end of the recession to recover to its pre-recession level. The NASDAQ took 540 trading days to recover to its pre-recession level, but the NASDAQ didn’t fully recover from the dot-com crash until 2015.
Stock performance during the early 1990s recession
The early 1990s recession (July 1990 to March 1991), didn’t have an overall negative impact on stocks. The S&P 500 gained 4.36 per cent over the course of the recession. The NASDAQ gained 4.38 per cent. However, during the recession, the S&P 500 fell 21.57 per cent from its highest point. The NASDAQ fell 32.53 per cent from its peak. The recession was relatively mild. Tight monetary policy laid the foundation, while a spike in oil prices following Iraq’s invasion of Kuwait tipped the economy into a recession.
Stock performance during the 1981–1982 recession
Over the course of the 1981–1982 recession (July 1981 to November 1982), the S&P 500 gained 6.76 per cent. The NASDAQ gained 8.24 per cent. During the recession, the S&P 500 fell 28.39 per cent from its highest point. The NASDAQ fell 31.59 per cent from its peak. Tight monetary policy meant to tame inflation created the conditions for the recession.
Stock performance during the 1980 recession
From January through July 1980, the United States was in a recession. The S&P 500 gained 15.04 per cent over the course of the recession. The NASDAQ gained 15.95 per cent. During the recession, the S&P 500 fell 19.83 per cent from its highest point. The NASDAQ fell 27.99 per cent from its peak. The aftermath of the energy crisis and tight monetary policy are considered leading causes of the recession.
How to invest during a recession
Going back to the 1940s, the S&P 500 falls an average of 29 per cent and it takes 131 days, on average, to bottom out after the traditional 20 per cent bear market correction trigger is reached. In 2022, we corrected more than 20 per cent and we did not actually see a recession. This business cycle is extremely unusual and the playbook is not clear, but some caution is still warranted.
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