“Monetary conditions exert an enormous influence on stock prices. Indeed, the monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.”
– Martin Zweig
June was a rollercoaster ride for investors. The S&P 500 punctuated a 3-week losing streak by falling firmly into bear market territory—down over 20% from its all-time high on January 3—only to rebound the following week by +6.5%. Inflation continues to be the driving force animating the Fed, which responded with a 75 bps rate hike on June 15th, the most significant move in 30 years.
Economic data (including market performance) and aggressive Fed activity have many market participants nervously watching for signs of a recession. Historically, two consecutive quarters of negative GDP growth were considered necessary to determine the onset of a recession. The National Bureau of Economic Research (NBER) changed that in 2020 because of the two-month COVID-induced recession. The official definition is now “the period between a peak of economic activity and its subsequent trough, or lowest point,” and its determination involves an ambiguous interpretation of the “depth, diffusion, and duration” of decline in economic activity. In short…market participants will only be made aware of an official recession when the NBER Business Cycle Dating Committee makes an official determination.
One of the best predictors of a recession is the stock market itself. As a forward-looking system, markets tend to fall in advance of recessions and start climbing earlier than the economy does. Market returns have tended to be positive during periods of economic recession. Over the past century, returns on U.S. equities have been positive two years after a recession began for 12 of the 16 recorded recessions. Using that data as a guide, long-term investors can take some solace in knowing that the optimal strategy has been to endure the downturn, ignore the talk of recession, and ride the recovery to higher levels over time.
Articles of Interest
Just two years removed from the last US recession, negative stock returns and aggressive US Federal Reserve interest rate hikes have many investors concerned we are headed for another big “R”—if we’re not already there. But recessions are always identified with a lag. By the time one is called, the worst of its impact on markets has usually passed.
You know that at some point, markets will decline. Perhaps the most unsettling aspect of market downturns is the perceived loss of control. That dread can be exacerbated by the constant drumbeat of dire news coverage of the financial markets and global and U.S. economies. However, you have the power to follow the actions that historically have resulted in success in weathering market lows.
History is a great reminder that the stock market is not the same as the economy. Market downturns can be frightening in the short term, but this analysis shows that for investors who can stay in the market for the long run, equity markets continue to provide rewards.
What documents can you throw out, and which must you save, and where do you put them, is a debate as old as, well, writing things down. But technology and natural disasters have thrown in a few new twists.
“…Say you don’t need no diamond ring
And I’ll be satisfied
Tell me that you want the kind of things
That money just can’t buy
I don’t care too much for money
Money can’t buy me love…” – The Beatles
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