This isn’t like any recession we’ve ever seen, as it was sparked by a horrible pandemic and happened because people were told to stay inside. The impact was the worst contraction in gross domestic product (GDP) last quarter that anyone who is reading this has ever seen. But what is quite surprising is the fact the Nasdaq has made 30 all-time highs so far in 2020, while the S&P 500 Index has gained four consecutive months, all while the unemployment rate remains above 10%.
Why is this happening? There are two main schools of thought. One is that stocks are forecasting a better economy later this year and into 2021; remember, stocks tend to lead the economy and could be doing so once again. Another school of thought is that the massive fiscal and monetary policy are boosting equity prices, while not helping the overall economy quite as much.
Here’s the catch. It actually isn’t abnormal to see stocks gain during a recession. “This is one that might surprise many people, but stocks have actually gained during 7 of the past 12 recessions,” explained LPL Financial Chief Market Strategist Ryan Detrick. “There’s no question the difference between what is happening on Wall Street compared with Main Street is about as wide as we’ve ever seen, but maybe it shouldn’t be as big of a surprise that stocks have been strong.”
As shown in the LPL Chart of the Day, the S&P 500 actually gained 1.3% on average when looking at the 12 previous recessions going back to World War II, with a very impressive median advance of 5.7% (the average is skewed lower due to 2008). We continue to expect this recession to end soon, if it isn’t over already. In fact, when the end of the recession is officially declared at a later date, we could have yet another recession that saw stock market gains.
For more of our investment insights and thoughts on this recession, check out our latest LPL Market Signals podcast.
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