Can the Stock Market Survive a Recession? “This will be rare.”

Finance


There are well-informed opinions flying around about the likelihood of a US recession right now, and it’s pretty clear. Stock markets historically don’t like recessions.

“As the U.S. economy completes its transition into the post-coronavirus era, the stock market will weather the recession of 2023-24,” Lori Calvasina, strategist at RBC Capital Markets, wrote in a note to clients. Only time will tell if it will be done,” he said. “While this is rare, it’s worth remembering that it’s not entirely unprecedented.”

Way back in 1937 (the Great Depression era of the US economy), the S&P 500 (^GSPC) has sold in the 14% to 57% range from peak to trough during recessions. The average decline in the S&P 500 due to recession is 32%.

There have been 13 official recessions since 1937, according to Calvasina research. The average drawdown period for the S&P 500 before and after these recessions was 381 days.

Stock markets typically bottom out four to five months before a recession ends, but according to RBC research, they bottomed out nine months before the recession ended. There is one exception. In the 2001 recession, the stock market bottomed out after 10 months.

Historical numbers like those done by Calvasina and her team are of interest to investors for many reasons.

Economists are beginning to recalibrate their economic thinking after the March collapses of Credit Suisse, Signature Bank and Silicon Valley Bank, with experts suggesting they are collectively tightening financial conditions doing.

That tightening was shown in last week’s earnings results for major banks including JP Morgan (JPM), Citigroup (C) and Wells Fargo (WFC).

Stock markets rarely survive recessions like this albino elk.  (Getty Images)

Stock markets rarely survive recessions like this albino elk. (Getty Images)

The Federal Reserve has hit the economy hard from a series of rate hikes dating back to early 2022. The Federal Reserve seems poised to maintain such a hawkish stance at least until his FOMC meeting in May.

“Given the pace of rate hikes, we are seeing a slowdown in the economy,” Mike Santomassimo, chief financial officer of Wells Fargo, told Yahoo Finance.

As things stand, Jefferies economists are forecasting another recession this year. Goldman Sachs sees a 35% chance of the US slipping into recession within the next 12 months.

Meanwhile, recent economic data have been largely uninspiring, only fueling new recession fears.

The latest retail sales report underwhelmed for the second month in a row. Sales of big-ticket items, especially electrical appliances, were generally squeezed.

Consumer confidence is also weakening as inflation fears rise again.

All of these factors have made some investors wary of a recession and potential market downturn, as Calvasina’s historical data shows.

Research Affiliates said, “The environment we are in today, rising inflation, rising interest rates and fissures in the financial system make a stock market crash far more likely than usual. I think it’s an environment where you can do that,” he said. CEO Chris Brightman warned on his Yahoo Finance Live.

Brian Sotzi Editor-in-chief of Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and LinkedInAny tips on deals, mergers, activist situations, etc? Email brian.sozzi@yahoofinance.com

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