Two ways to think about this chart of stocks and recessions

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Jim Reid, the bank’s macro strategist, wrote that “historically the S&P 500 normally always hits the low in a recession and usually not halfway.”

Reid and his colleagues expect the US economy to go into recession in 2023. As such, they also believe the S&P 500 will “likely” see a low that year before resuming any rally.

There are two ways of thinking about this graph.

First, recessions are common in history, and recession-related market downturns can be very difficult. On average, the S&P has historically lost around a third of its value during these periods.

Second, the chart reminds us that the stock market has always recovered those losses and then some. Yes, there are long periods of difficulty, which make the market unfavorable for investors with a weak stomach and very short time horizons. But for those with long-term investment horizons, time pays off.

According to FactSet, 240 of the S&P 500 companies mentioned the “recession” in their recent second quarter earnings statements. This was well above the five-year average of 52. It is clear that recessions are on many people’s minds.

But it is not all darkness.

“The problem with recessions is that they are always followed by a recovery,” Jeff Campbell, CFO of American Express, She said to the request for profits of the company.

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Review of cross-current macros πŸ”€

There were some important data points from the past week to consider.

  • According to Patrick De Haan of GasBuddy, the national average price of gasoline has dropped to $ 3.72 on Fridaysdown from its maximum of $ 5.02 on June 14. This is great news as energy is one of the main drivers of most inflation measures.




  • The Conference Board’s Employment Trends Index, a set of labor market indicators, improved in August. From company economist Frank Steemers: β€œThe labor shortage can continue to be a challenge for businesses and, even if it subsides during an upcoming recession, it could soon reappear after economic activity resumes. Therefore, employers can try to keep their workers. “


  • Consumers, including low-income ones, still have money to spend. From a Bank of America report released Friday: β€œBank of America data also indicates that customer savings and checking accounts continue to remain high compared to before the pandemic. The largest proportionate increases in median saving and control balances are observed in low-income households (Figure 11). There has been some increase in the share of total credit card spending in Bank of America’s internal data, Exhibit 12, but this is relatively small. The increase also appears to be more concentrated in higher-income households rather than lower-income ones. “


  • The massive US service sector has arrived with mixed reports. According to the ISM Services PMI, industry growth accelerated in August. Meanwhile, the S&P Global US Services PMI suggested that activity in the sector contracted at the sharpest rate since May 2020. However, both reports showed that prices were cooling, supplier delivery times were normalizing. and the assumptions were still positive.

  • Supply chains have improved significantly in recent months. The New York Fed’s Global Supply Chain Pressure Index, a composite of various supply chain indicators, fell in August to its lowest level since February 2021, meaning supply chains are loosening.


  • Mortgage rates continue to rise. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 3.89% during the week ending September 8. This was the highest reading since November 2008.



  • New data from Redfin confirmed this negative sales sentiment. From Redfin’s weekly real estate market update: “New homes for sale listings fell 18% from the previous year, also the biggest drop since May 2020. Active listings (the number of homes for sale in any moment during the period) decreased by 1.2% from the previous four-week period. “


  • Shares rose last week with the S&P 500 up 3.6% to close at 4,067.36. The index is now down 15.2% from the January 3 closing high of 4,796.56 and up 10.9% from the June 16 closing low of 3,666.77.

Putting it all together πŸ€”

Whether due to the slowdown in the economy or the cooling of the housing market, inflation appears to be moderating and supply chains appear to be improving. All of this is happening while the labor market remains solid, characterized by a low level of layoffs.

While price indicators have eased, inflation remains high. And therefore financial markets remain volatile as the Fed increasingly tightens financial conditions in its effort to reduce inflation. Therefore, recession risks remain and analysts have reduced their earnings forecasts. For now, all of this creates a conundrum for the stock market until we have “compelling evidence” that inflation is indeed under control.


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Here’s a roundup of some of Tker’s most talked about free and paid newsletters. All titles are hyperlinked to the archived pieces.

Over 700 reasons why investing in the S&P 500 index is not very “passive”πŸ’‘

Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500, an index of the 500 largest US companies, is far from a static set of 500 shares. From January 1995 to April 2022, 728 tickers were added to the S&P 500, while 724 were removed.

“Past performance is no guarantee of future results,” he said πŸ“Š

The S&P Dow Jones indices found that funds beat the benchmark in a given year are rarely able to continue to outperform in subsequent years. According to their research, 29% of 791 large-cap equity funds beat the S&P 500 in 2019. Of these funds, 75% again beat the benchmark in 2020. But only 9.1%, or 21 funds, are was able to extend that streak of outperformance into 2021.

The stock market’s huge sales are normal🎒

Investors should always be mentally prepared for some big sell-off in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P has recorded a maximum annual average drawdown (i.e. the largest intra-year sell-off) of 14%.

Goldman Sachs destroys one of the most persistent myths about investing in stocks 🀯

“While valuations play an important role in our toolbox for estimating forward equity returns, we should dispel an often repeated myth that equity valuations are returning to average,” said analysts at Goldman Sachs. “… there is only 26% confidence that Shiller CAPE is returning to bad luck and 74% confidence that it is not.”

One statistic shows how difficult it is to pick stocks that beat the market 🎲

Choosing stocks in an attempt to beat market averages is an incredibly challenging endeavor and sometimes makes you lose money. In fact, most professional stock selectors are unable to do this consistently. One reason is that most stocks don’t offer above-average returns. According to S&P Dow Jones indices only 22% of stocks in the S&P 500 outperformed the index itself from 2000 to 2020. Over that measurement period, the S&P 500 gained 322% while the median stock rose only 63%.

Trillion dollar exposure πŸ’°

Five stocks (Facebook, Apple, Amazon, Microsoft and Google) represent a huge share of the market capitalization of the S&P 500, which includes 500 companies. While it may be technically accurate to say that these five stocks represent five companies, it is also a gross oversimplification of the businesses and markets to which these companies are exposed.

10 truths about the stock market πŸ“ˆ

The stock market can be an intimidating place – there is real money at stake, there is a huge amount of information, and people have lost their luck very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The main difference between these two perspectives is related to stock market misconceptions that can lead people to make bad investment decisions.

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Sam Ro is the author of Follow him on Twitter at @SamRo

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