Stock Market Loses -34% During a Recession, On Average
RECESSIONS LEAD TO STOCK MARKET LOSSES
Every recession going back to the 1920s has led to a loss in the stock market of -34.9% (on average, see table below, as measured by the S&P 500). Many investors believe that a recession will begin mid to late 2023.
RECESSION RUMBLINGS – In 2021 and 2022 business experts have been warning of a pending recession.
12/17/2021: “There have been few, if any, instances in which inflation has been successfully stabilized without recession.” - Larry Summers, Treasury Secretary under Bill Clinton
05/15/2022: The Hill: ‘Goldman’s Blankfein says US facing ‘very, very high risk’ of recession’
05/17/2022: "Every single time in the last 80 years when the Fed was raising rates to bring down inflation more than 4 percentage points the economy crashed and landed into a recession - and I haven't seen a credible case that this time is different." - Jim Bianco
09/16/22: CNBC: ‘FedEx CEO says he expects the economy to enter a ‘worldwide recession’
THREE ECONOMIC RECESSION SIGNALS
Instead of listening to opinions we can instead turn to economic indicators that have reliably predicted recessions.
1. Leading Economic Indicators Contracting
The Conference Board’s Leading Economic Indicator Index (LEI) is very predictive of recessions. The following chart from The Macro Compass substack summarizes the LEI over the past 50 years. The index tells us whether leading economic indicators are expanding or contracting, as the LEI continues to shrink a recession is more likely. The index has proceeded every U.S. recession going back to 1974.
A visit to the Conference Boards website, at https://www.conference-board.org/topics/us-leading-indicators, gives us another view of the same data. According to their charting of the LEI we have already entered their Warning Signal and Recession Signal. As we have seen from past data, a contraction of the LEI Index to a level below -5 has been coincident with recessions.
2. Michigan Consumer Sentiment at 50 Year Low
A significant drop in consumer sentiment tends to proceed recessions. The University of Michigan Consumer Sentiment index is at its’ lowest level since the index began 50 years ago. A 20+ point drop in the index has always proceeded a recession. (chart source: FRED – Federal Reserve Economic Data)
3. Yield Curves Inverted
Many consider an inversion of the yield curve to be the most accurate indicator of a pending recession. The inversion of the 10s over 2s, and the 10s over 90 day, has proceeded every recession going back to 1981. Note: the yield curves can invert 6 to 12 months before a recession occurs. (chart source: FRED – Federal Reserve Economic Data)
NOTABLE HEADLINES INDICATING A POSSIBLE ECONOMIC SLOWDOWN
06/10/22: Reuters: ‘U.S. consumer sentiment tumbles to record low in early June-survey’
07/23/22: “Yeah, everything was going really well, and it seemed like, all the sudden, it just, we dropped in units, and, but it was still enough to keep us, keep us going and everything,” Keystone RV Company Plant 41 worker Robert Davis told 16 News Now. “But then, just all the sudden, it came to a halt.”
08/02/22: CNBC: ‘Credit card balances jump 13%, highest leap in over 20 years, as inflation outpaces wage growth’
09/26/22: DailyMail: ‘The Wall Street cull begins: Goldman Sachs fires bankers at all levels after dishing out bonuses and hiking salaries during pandemic - as the bank is expected to record more than 40 percent drop in earnings this year’
10/11/22: Wall Street Journal: ‘PC Shipments Plunge 20%, Steepest Drop In More Than 20 Years’
10/19/22: CNBC: ‘66% of American workers are worse off financially than a year ago due to inflation, report finds’
10/21/22: Bloomberg: ‘AmEx Shares Fall as Provisions for Souring Loans Soar’
11/06/22: CNBC: ‘China’s exports unexpectedly shrink in October, badly missing expectations for growth’
11/15/22: CNBC: ‘Household debt soars at fastest pace in 15 years as credit card use surges, Fed report says’
11/16/22: CNBC: ‘Target warns of soft holiday quarter as profit tumbles – sales decline as families contend with higher prices, making trade-offs between what they need and what they want’
11/18/22: Zerohedge: ‘JP Morgan 2023 recession its’ base case, expects a million jobs lost by mid-2024’
11/18/22: Bloomberg: ‘U.S. existing home sales are crashing at their fastest pace since Lehman’
11.19/22: CNBC: ‘Ad market worse than during lows of the pandemic, says Warner Bros Discovery CEO David Zaslav’
12/16/22: Yahoo Finance: ‘Rising car repossessions trend warning sign for economy, report says’
12/21/22: CNBC: ‘Home sales tumbled more than 7% in November, the 10th straight month of declines’
LPL 398049-1
DEFINITIONS
10 Year Treasury Constant Maturity Minus 2 Year Treasury Constant Maturity - Treasury bond data used in calculating interest rate spreads is obtained directly from the U.S. Treasury Department. Series is calculated as the spread between 10-Year Treasury Constant Maturity (BC_10YEAR) and 2-Year Treasury Constant Maturity (BC_2YEAR). Both underlying series are published at the U.S. Treasury Department.
10 Year Treasury Constant Maturity Minus 90 Day Treasury Constant Maturity - Treasury bond data used in calculating interest rate spreads is obtained directly from the U.S. Treasury Department. Series is calculated as the spread between 10-Year Treasury Constant Maturity (BC_10YEAR) and 90 Day Treasury Constant Maturity (BC_90DAY). Both underlying series are published at the U.S. Treasury Department.
Conference Board Leading Economic Index - The index is constructed to summarize and reveal common turning points in the economy in a clearer and more convincing manner than any individual component. The LEI is a predictive variable that anticipates (or “leads”) turning points in the business cycle by around 7 months. Shaded areas denote recession periods or economic contractions. The ten components of The Conference Board Leading Economic Index® for the U.S. include: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; ISM® Index of New Orders; Manufacturers’ new orders for nondefense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500® Index of Stock Prices; Leading Credit Index™; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions.
Federal Reserve Regional Manufacturing surveys – The surveys are a result of a monthly survey of manufacturers in the respective Reserve Bank Region. Surveys are based on responses to a questionnaire sent out on the first day of each month to an unchanged pool of top manufacturing executives, generally the president or CEO. The questionnaire seeks their opinion on the change in several business indicators from the previous month and solicits their six-month projections for those indicators. The index is widely watched by professionals and investors for insights on the state and direction of manufacturing within the Region.
Gross Domestic Product (GDP) - The total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health. Though GDP is typically calculated on an annual basis, it is sometimes calculated on a quarterly basis as well.
S&P 500 Index - The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90. The index is a capitalization weighted index of the 500 large companies listed on various stock exchanges (such as the NYSE or NASDAQ). The S&P 500 was developed and continues to be maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global. The S&P 500 differs from the Dow Jones Industrial Average and the NASDAQ Composite index, because of its diverse constituency and weighting methodology. It is one of the most followed equity indices, and many consider it one of the best representations of the U.S. stock market.
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