This post was originally posted on TKer.com.
Jim Reid, a macro strategist at the bank, wrote that “historically, the S&P 500 normally always only bottoms out in a recession and usually not until the midpoint.”
Reid and his colleagues expect the US economy to enter a recession in 2023. As such, they also believe the S&P 500 is “likely” to bottom out that year before resuming any recovery.
There are two ways to think about this painting.
First, recessions are common in history and recession-related market downturns can be very difficult. On average, the S&P has historically lost about a third of its value during these periods.
Second, the chart reminds us that the stock market has always recouped those losses and more. Yes, there are long periods of difficulty, which makes the market unfriendly to investors with weak stomachs and very short time horizons. But for those with longer-term investment horizons, time pays.
According to FactSet, 240 of the S&P 500 companies mentioned “recession” during their recent second-quarter earnings calls. That was well above the five-year average of 52. It’s clear that recessions are on the minds of a lot of people.
But it’s not all dark.
“The problem with recessions is that they are always followed by a recovery,” said Jeff Campbell, chief financial officer of American Express, said on the company’s earnings call.
Review of macro cross currents 🔀
There were a few notable data points from the past week to consider.
According to Patrick De Haan of GasBuddy, the average national gasoline price has fallen to $3.72 on Fridaydown from its high of $5.02 on June 14. This is great news as energy is a major driver of most inflation measures.
The Conference Board’s Employment Trends Index, a composite of labor market indicators, improved in August. From firm economist Frank Steemers: “Labour shortages may continue to be a challenge for businesses, and even if they ease during a coming recession, they could soon reappear after the economic recovery resumes. ‘economic activity. Therefore, employers may try to retain their workers.“
Consumers, including low-income consumers, still have money to spend. According to a Bank of America report released on Friday: “Data from Bank of America also indicates that customer savings and checking accounts continue to remain elevated relative to pre-pandemic levels. The largest proportional increases in median savings and control balances are observed in low-income households (Table 11). There was some increase in the share of total credit card spending in Bank of America internal data, Exhibit 12, but this is relatively small. The rise also appears to be more concentrated in high-income households rather than low-income ones.
The massive services sector in the United States came with mixed reports. According to the ISM Services PMI, growth accelerated in the sector in August. Meanwhile, the S&P Global US Services PMI suggested activity in the sector contracted at the fastest rate since May 2020. However, both reports showed prices falling, delivery times for suppliers were normalizing and hiring was still positive.
Supply chains have improved considerably in recent months. The New York Fed’s Global Supply Chain Strain Index – a composite of various supply chain indicators – fell in August to its lowest level since February 2021, meaning chains supplies relax.
Mortgage rates continue their upward trend. According to Freddie Mac, the average 30-year fixed rate mortgage rose to 3.89% in the week ending September 8. It was the highest reading since November 2008.
New data from Redfin confirmed this negative selling sentiment. From Redfin’s weekly housing market update: “New listings of homes for sale were down 18% year-on-year, also the biggest drop since May 2020. Active listings (the number of homes listed for sale at any time during the period) fell 1.2% compared to the previous four-week period.“
Stocks rebounded last week with the S&P 500 up 3.6% to close at 4,067.36. The index is now down 15.2% from its January 3 closing high at 4,796.56 and up 10.9% from its June 16 closing low at 3,666.77. .
Putting it all together 🤔
Whether due to the slowing economy or cooling housing market, inflation appears to be moderating and supply chains appear to be improving. All of this is happening as the labor market remains robust, marked by low layoff activity.
While price indicators have eased, inflation remains elevated. As a result, financial markets remain volatile as the Fed increasingly tightens financial conditions in its effort to bring down inflation. Thus, the risks of recession persist and analysts have revised their earnings forecasts downwards. For now, all of this creates a conundrum for the stock market until we get “hard evidence” that inflation is well under control.
The best of TKer 📈
Here’s a look at some of TKer’s most talked about paid and free newsletters. All titles are hyperlinked to archived pieces.
700+ reasons why S&P 500 index investing isn’t very “passive”💡
Passive investing is a concept commonly associated with buying and holding a fund that tracks an index. And no passive investment strategy has garnered more attention than buying an S&P 500 index fund. However, the S&P 500 – an index of 500 of America’s largest companies – is anything but a static lot of 500 shares. From January 1995 to April 2022, 728 tickers were added to the S&P 500, while 724 were removed.
“Past performance does not guarantee future results,” said 📊
The S&P Dow Jones Indices have found that funds that beat their benchmark in one 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 those funds, 75% beat the benchmark again in 2020. But only 9.1%, or 21 funds, were able to prolong this sequence of outperformance. in 2021.
Stock market sales that make your stomach turn are normal🎢
Investors should always be mentally prepared for big sell-offs in the stock market. That’s part of the deal when investing in an asset class sensitive to the constant flow of good and bad news. Since 1950, the S&P has experienced an average annual maximum decline (i.e. the largest intra-annual sell-off) of 14%.
Goldman Sachs busts one of the most enduring myths about stock investing 🤯
“While valuations are an important part of our toolbox for estimating future stock returns, we should dispel the oft-repeated myth that stock valuations are mean reverting,” Goldman Sachs analysts said. “…there is only 26% confidence that Shiller’s CAPE is mean-reverting, and 74% confidence that it is not.”
A statistic shows how hard it is to pick stocks that beat the market 🎲
Picking stocks with the goal of beating market averages is an incredibly difficult and sometimes expensive endeavor. In fact, most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks do not offer above average returns. According to the S&P Dow Jones indices, only 22% of S&P 500 stocks have outperformed the index itself from 2000 to 2020. During this measurement period, the S&P 500 has gained 322% while the median stock has risen only 63%.
A trillion dollar exhibit 💰
Five stocks (Facebook, Apple, Amazon, Microsoft and Google) make up a massive share of the market capitalization of the S&P 500, which is made up of 500 companies. While it may be technically accurate to say that these five stocks represent five companies, this is also an oversimplification of the businesses and markets to which these companies are exposed.
10 truths about the stock market 📈
The stock market can be a daunting place: it’s real money at stake, there’s an overwhelming amount of information, and people have lost fortunes there very quickly. But it is also a place where thoughtful investors have accumulated a lot of wealth for a long time. The main difference between these two perspectives has to do with the misconceptions about the stock market that can cause people to make poor investment decisions.
This post was originally posted on TKer.com.
Sam Ro is the author of TKer.co. Follow him on Twitter at @SamRo
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