Two ways to think about this chart of stocks and recessions


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Jim Reid, macro strategist at the bank, wrote that “historically, the S&P 500 typically only bottoms out in a recession, and typically not halfway through.”

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 hit a low that year before resuming any rally.

There are two ways to think of this graph.

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

Second, the graph reminds us that the stock market has always recouped those losses and then some. Yes, there are prolonged periods of difficulty, which makes the market unfriendly to investors with weak stomachs and very short time horizons. But for those with longer investment horizons, time pays.

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

But it is not all pessimism.

“The thing about recessions is that they are always followed by a recovery,” Jeff Campbell, chief financial officer of American Express, said on the company’s earnings call.

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Reviewing the macro cross currents πŸ”€

There were some notable data points from last week to consider.

  • According to Patrick De Haan of GasBuddy, the national average price of gasoline fell to $3.72 on Fridaybelow your height $5.02 on June 14. This is great news as energy is a main driver of most measures of inflation.




  • the conference board Employment Trends Index, a composite of labor market indicators, improved in August. From firm economist Frank Steemers: β€œLabor shortages can continue to be a challenge for businesses, and even if they subside during a looming recession, they could resurface soon after economic activity picks up. Therefore, employers can try to retain their workers.


  • Consumers, including low-income consumers, I still have money to spend. Starting from a bank of america report published Friday: β€œData from Bank of America also indicates that customers’ checking and savings accounts continue to be elevated relative to before the pandemic. The largest proportional increases in median savings and current balances are seen in the lowest-income households (Chart 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 focused on higher-income households than lower-income ones.”


  • The huge US services sector came in with mixed reports. According to the ISM Services PMI, the growth of the sector accelerated during August. Meanwhile, the S&P Global US Services PMI suggested activity in the sector contracted at the highest rate since May 2020. However, both reports showed that prices were cooling, supplier lead times were normalizing and hiring was still positive.

  • Supply chains have improved considerably in recent months. the New York Fed Global Supply Chain Pressure Index β€” a composite of several supply chain indicators β€” fell in August to its lowest level since February 2021, meaning supply chains are loosening up.


  • Mortgage rates continue to trend upwards. According to freddy macThe average 30-year fixed-rate mortgage rose to 3.89% for the week ending September 8. This was the highest reading since November 2008.



  • New data from Redfin confirmed this negative selling sentiment. From Redfin’s weekly housing market update: β€œNew home listings for sale fell 18% from a year earlier, 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% from the previous four-week period.”


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

Putting it all together πŸ€”

Whether due to slowdown in the economy or the housing market cooling, inflation appears to be moderating Y supply chains appear to be improving. All this is happening as the the labor market remains strongmarked by low layoff activity.

Although the price indicators have been relaxing, inflation is still high. And so financial markets remain volatile As the The Fed increasingly tightens financial conditions in its effort to reduce inflation. As such, downside risks remain and analysts have been cutting their earnings forecasts. For now, all this makes a conundrum for the stock market until we getconvincing evidence” that inflation is effectively under control.


The best of TKer πŸ“ˆ

Here is a roundup of some of the most talked about free and paid newsletters from TKer. All headlines are hyperlinked to the archived pieces.

700+ Reasons Why Investing in the S&P 500 Index Isn’t Very “Passive”πŸ’‘

Passive investing is a concept generally associated with buying and holding a fund that tracks an index. And no passive investment strategy has gotten as much attention as buying an S&P 500 index fund. Yet the S&P 500, an index of 500 of America’s largest companies, is anything but a static 500 action game. 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

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

Stomach-churning stock sell-offs are normal🎒

Investors should always be mentally prepared for big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant stream of good and bad news. Since 1950, the S&P has experienced an average annual maximum drawdown (ie, the highest intra-year liquidation) of 14%.

Goldman Sachs Debunks One of the Most Persistent Myths About Stock Investing 🀯

While valuations play an important role in our toolbox for estimating future stock returns, we need to dispel the oft-repeated myth that stock valuations are mean-reverting. Goldman Sachs. β€œβ€¦we are only 26% confident that the Shiller CAPE is mean reverting and 74% confident that it is not.”

A statistic shows how hard it is to pick stocks that outperform the market 🎲

Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing endeavor. In fact, most professional stock pickers can’t 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 outperformed the index itself between 2000 and 2020. During that measurement period, the S&P 500 gained 322%, while the median stock rose just 63%.

Billion dollar exposure πŸ’°

Five stocks (Facebook, Apple, Amazon, Microsoft, and Google) account for a massive chunk of the market capitalization of the S&P 500, which consists of 500 companies. While it may be technically correct to say that these five stocks represent five companies, it is also an oversimplification of the businesses and markets these companies are exposed to.

10 truths about the stock market πŸ“ˆ

The stock market can be an intimidating place: there is real money at stake, there is an overwhelming amount of information, and people have lost fortunes very quickly. But it’s also a place where thoughtful investors have amassed a lot of wealth for a long time. The main difference between those two perspectives is related to misconceptions about the stock market that can lead people to make poor investment decisions.

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

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