With stock and bond markets off to their worst start in many years and the Federal Reserve continuing to hike interest rates, many are starting to discuss the possibility of a recession. Other factors such as supply chain bottlenecks, elevated inflation, geopolitical uncertainty, and rising gasoline prices certainly do not counter that argument. Yet, as we look at the data, we see some reasons for optimism around the stock market.
First, let us set aside the discussion about whether we will see a recession or not. The National Bureau of Economic Research — the group responsible for declaring recessions — will only declare a recession upon having the data to confirm what we will, by then, already know. That declaration may come many months after the fact and for investors that information is relatively useless. Instead, we believe it is essential to acknowledge that the markets are not the economy and vice versa. In reality, the markets tend to discount future economic activity by about six to nine months.
Currently, we believe the markets are saying a recession is likely, although the timing is uncertain. We have already seen one quarter of negative GDP growth in the first quarter of 2022 and a second consecutive quarter would meet the historical definition of a recession. From our vantage point, if we are in a recession it appears relatively mild compared to the great financial crisis or the recession triggered by the COVID pandemic. Some might call this a “garden variety” recession.
When analyzing historical stock market performance data, we find the median drawdown around recessions to be 24%. From their peaks in early January, the S&P 500 has declined as much as 20% and the NASDAQ has pulled back more than 30%.
In our view, the markets have already priced in a possible recession, so if or when the news actually comes, the markets may not react. Further, the markets could have a favorable reaction if we receive any positive news related to inflation, gasoline prices, or the Fed being less hawkish.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or firstname.lastname@example.org.
Gregory S. Hansen
Vice President, Managing Director of Trust Investments
This information has been prepared by Legacy Private Trust Company for informational purposes. Any opinions expressed herein represent our current analysis and judgment and are subject to change. Actual results, performance, or events may differ based on changing circumstances. No statements contained herein should substitute for professional legal, tax, or other specialized advice.