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Can stock-market investors just ignore a recession?
Bond market investors have priced in rate cuts by year end and have sent other signals they’re bracing for recession. Stocks, meanwhile, seem to reflect a different outlook, rallying into first-quarter earnings season, with the S&P 500
SPX,
hovering near the top end of its 2023 range after hitting a two-month high last week. Stocks ended Monday’s choppy session with small gains, as the S&P 500 and Dow Jones Industrial Average
DJIA,
each rose 0.3%.
It’s served to annoy some investors, who feel that stock-market participants are simply failing to acknowledge the threat of a potential recession, said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, in a Monday note.
Calvasina said clients are asking whether it’s possible for the stock market to bottom out before a recession hits, while noting RBC’s contention that the S&P 500 had priced in a recession when it hit its October low, marking a roughly 25% fall from its Jan. 3 record close. After all, fears that aggressive tightening by the Federal Reserve would drive the U.S. economy into a recession were a clear driver for that move lower, she wrote.
But Calvasina said it also occurred to her that there was one period in history when stocks did appear to ignore a recession. It occurred in 1945 as the U.S. exited World War II (see chart below).
RBC Capital Markets
The recession was brief, running from February to October, as pivot from a wartime to a peacetime economy saw government spending suddenly dry up. Unemployment remained low despite soldiers returning home to compete with civilians for jobs. The stock market, meanwhile, had seen volatile conditions before the recession hit, with the S&P 500 dropping 43% in the early years of the war, exceeding somewhat the typical recession drawdown, Calvasina noted.
Stocks bottomed and pivoted sharply in 1942 as momentum shifted back toawrd the Allies and rallied strongly through the end of the war, save for a brief, 13% pullback in 1943, she noted.
So, what does the history lesson say about current conditions?
“While there are clear differences between 1945 and today, one thing that both have in common is that unprecedented historical events caused dramatic shifts in the economy that required a tough transition back to more normal conditions,” Calvasina wrote.
“In the case of 1945, this resulted in a technical recession that the stock market was able to look past, perhaps due to all the pain it had already taken. Time will tell whether the stock market can look past any recession that occurs in 2023-2024 as the U.S. economy completes its transition into the post-COVID era. It’s worth keeping in mind that while this would be rare, it wouldn’t be entirely unprecedented.”
Check out: Why 5% interest rates might not derail the stock market or the U.S. economy
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