The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is charged with maintaining official records of expansions and recessions in the United States. The NBER defines a recession as a significant decline in economic activity while an expansion is defined as a period where economic activity rises substantially. According to the NBER, since 1929 there have been 15 recessions in the US lasting an average of 13 months each.
In our opinion, the current environment likely achieves the NBER’s definition of a recession, albeit a mild one for now. Real GDP increased by +6.9% in Q4 2021 before falling to -1.6% in Q1 2022 and -0.6% in Q2 2022. While the NBER does not view two consecutive negative quarters of GDP growth as a recession, the current period probably meets the test of a significant decline in economic activity. The NBER usually waits for several months after the fact to announce the official start and end dates for recessions. Therefore, it is possible the United States is already in a recession that started in earlier this year. Of course, not all recessions are created equal. The current economic period looks far better than past severe recessions like the Great Depression or Financial Crisis.
We will point out that recessions can have historically rewarded many long-term investors and can create strong near-term buying opportunities. During the last 15 recessions, the S&P 500 declined by an average of -30.0%. However, once the market bottomed, performance was very strong over subsequent 1-YR (+50.1%), 3-YR (+79.0%), and 5-YR (+142.1%) periods.
Of course, calling market tops and bottoms in real-time is extraordinarily difficult. In investing, perfect can be the enemy of good. While it would be nice to make the perfect investment at THE market bottom, we advise not letting that temptation stop you from making a good investment today. No one knows when the ultimate market bottom will occur since it can only be identified in hindsight (although this will not stop the pundits from guessing). If you believe the current environment is at least a good time to invest, then we suggest taking advantage by rebalancing, repositioning, or putting some new capital to work.
In the current period, the S&P 500 declined by -24.3% from January 3rd through September 30th as the market was beginning to price in a recession. We are not sure if September 30th marks the bottom for this period, however, in our opinion a decline of that magnitude creates opportunities for long-term investors. Unless your view is that this is the start of another Great Depression or Financial Crisis, then a lot of the damage in the equity market may have already occurred at the recent low. We are continuing to try and make lemonade out of lemons by tax-loss harvesting, repositioning, rebalancing, and putting money to work for clients who have recently contributed cash to their portfolios. While the market may have another leg lower, we suspect that over time we will look back on this period as another strong buying opportunity during a difficult economic environment. Historically, equity markets have recovered from recessions and downturns. It is important to consider your risk tolerance and time horizon and let your advisor know of any changes, or liquidity needs. No strategy assures success or protects against loss.
Source: National Bureau of Economic Research (NBER) and Bloomberg
DISCLOSURES
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All indexes mentioned are unmanaged indexes which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Rebalancing a portfolio may cause you to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Diversification does not protect against market risk. All investing involves risk which you should be prepared to bear.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Winthrop Wealth, a Registered Investment Advisor and separate entity from LPL Financial.
< COMMENTARY
Market Commentary | December 22, 2022
United States Recessions and S&P 500
By Andrew Murphy, CFA
Co-Chief Investment Officer
The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is charged with maintaining official records of expansions and recessions in the United States. The NBER defines a recession as a significant decline in economic activity while an expansion is defined as a period where economic activity rises substantially. According to the NBER, since 1929 there have been 15 recessions in the US lasting an average of 13 months each.
In our opinion, the current environment likely achieves the NBER’s definition of a recession, albeit a mild one for now. Real GDP increased by +6.9% in Q4 2021 before falling to -1.6% in Q1 2022 and -0.6% in Q2 2022. While the NBER does not view two consecutive negative quarters of GDP growth as a recession, the current period probably meets the test of a significant decline in economic activity. The NBER usually waits for several months after the fact to announce the official start and end dates for recessions. Therefore, it is possible the United States is already in a recession that started in earlier this year. Of course, not all recessions are created equal. The current economic period looks far better than past severe recessions like the Great Depression or Financial Crisis.
We will point out that recessions can have historically rewarded many long-term investors and can create strong near-term buying opportunities. During the last 15 recessions, the S&P 500 declined by an average of -30.0%. However, once the market bottomed, performance was very strong over subsequent 1-YR (+50.1%), 3-YR (+79.0%), and 5-YR (+142.1%) periods.
Of course, calling market tops and bottoms in real-time is extraordinarily difficult. In investing, perfect can be the enemy of good. While it would be nice to make the perfect investment at THE market bottom, we advise not letting that temptation stop you from making a good investment today. No one knows when the ultimate market bottom will occur since it can only be identified in hindsight (although this will not stop the pundits from guessing). If you believe the current environment is at least a good time to invest, then we suggest taking advantage by rebalancing, repositioning, or putting some new capital to work.
In the current period, the S&P 500 declined by -24.3% from January 3rd through September 30th as the market was beginning to price in a recession. We are not sure if September 30th marks the bottom for this period, however, in our opinion a decline of that magnitude creates opportunities for long-term investors. Unless your view is that this is the start of another Great Depression or Financial Crisis, then a lot of the damage in the equity market may have already occurred at the recent low. We are continuing to try and make lemonade out of lemons by tax-loss harvesting, repositioning, rebalancing, and putting money to work for clients who have recently contributed cash to their portfolios. While the market may have another leg lower, we suspect that over time we will look back on this period as another strong buying opportunity during a difficult economic environment. Historically, equity markets have recovered from recessions and downturns. It is important to consider your risk tolerance and time horizon and let your advisor know of any changes, or liquidity needs. No strategy assures success or protects against loss.
DISCLOSURES
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All indexes mentioned are unmanaged indexes which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Rebalancing a portfolio may cause you to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Diversification does not protect against market risk. All investing involves risk which you should be prepared to bear.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Winthrop Wealth, a Registered Investment Advisor and separate entity from LPL Financial.