Friday, February 10, 2023
Consensus still has a recession in the next year more likely than not, although we believe it would probably be relatively shallow if it occurred and the possibility of a soft landing is increasing. We view most of the recession risk to be concentrated in the first half of the year followed by a potential rebound in the second half. (See Tuesday’s blog for a deeper dive on our recession views.)
When it comes to recessions and stocks, there are some roughly typical patterns, but also a lot of variety. The chart below looks at how stocks have performed from a year before to a year after the last 10 recessions. Keep in mind the National Bureau of Economic Research (NBER) does not try to make decisions in real-time, often calling a recession after we are well into it, since it takes time for definitive evidence of a recession to accumulate. For the six recessions for which we have data on the timing of NBER’s calls, they’ve made the announcement 2–10 months after the recession has started, with an average of a little over five months.
Some of the numbers behind the data:
- On average, the S&P 500 Index lost 4% in the year before a recession, but half the recessions saw gains in the prior year. Weakness is typical, but it’s not atypical to see gains.
- The first six months after the start of a recession averaged a loss of 5%, and in only two cases was the S&P 500 higher (1980 and 2020).
- The average low point following the start of the recession was about 2.5 months into the recession, with an average loss of 6.9%, but two of ten recessions saw a gain at that point (1960 and 2001).
- A year after a recession has started, the S&P 500 was down slightly on average (-0.9%), but was higher six out of ten times. Our last two recessions strike quite a contrast, with the S&P 500 down over 30% a year later in 2008, but up over 30% in 2009-2010.
- While not in the chart, two year after the start of a recession the S&P 500 Index was higher seven out of ten times, with 1973, 2001, and 2008 being the exceptions.
Recessions are usually accompanied by increased market risk and at least early on the S&P 500 typically declines. While the average bottom is at 2.5 months, there is tremendous variability, depending on the causes of the recession. We see several reason why a potential recession in 2023 would likely be more similar to one of the more benign scenarios:
- Some risk was already priced in during 2022, including improved valuations
- The widespread consensus around the likelihood of a recession means it would not be as much of a market shock if it occurred
- The relative lack of the types of economic imbalances that have led to deeper sell-offs.
At the same time, we acknowledge risk to the downside in the event of a deeper or longer lasting recession than we anticipate.
LPL Research’s Asset Allocation Committee is maintaining its tactical overweight to equities that has been in place since July 1, 2022. We continue to gauge shifts in the balance of risk and reward as the equity market continues to rally.
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All index and market data from FactSet and MarketWatch.
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