Is it possible that the S&P 500 can predict the end of a recession? Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan, recently presented a chart showing the remarkable consistency of equities bottoming before traditional recession indicators.
The image below shows his research – let’s focus on the first image showing the Eisenhower recession. The S&P 500 bottomed in December of 1957 (the blue dotted line). Within the next twelve months, GDP, Payrolls, and Earnings bottomed before changing course to the upside. In all recessions since the 1950s, the S&P 500 bottoms and moves to the upside before traditional recession indicators – except for the Dotcom bubble, which Cembalest argues was barely a recession.
Why is this important? If we see the same results from the charts above, we’ll likely want to prepare ourselves for headlines from the media, like,
“The market continues to rally despite negative earnings/payroll/GDP prints.”
“When will earnings/GDP/Payroll numbers become a headwind for market returns?”
“How long can the market go up with recession indicators flashing?”
So, where are we today? The S&P 500 hit a new low for 2022 on October 12th. From 10/12 through 10/28, the S&P 500 was up over 9% – though we’ve seen a pullback in the days since. We’ve begun to see Earnings and GDP move to the downside while the Fed continues rate increases to decrease payroll numbers and inflation. Will history repeat itself, and have we begun to see the start of a market recovery?
The truth is that no one knows. However, sticking with an investment strategy is vital to avoid seller’s remorse during times of uncertainty or volatility. One of the hardest parts of being an investor in a down market is staying the course. We’re problem solves by nature, so our intuition tells us to make a change to stop the bleeding. However, as I wrote in Missing the Best Days in the Market,
“…the best market days are often intertwined with the worst. In fact, in the past 20 years, 50 percent of the S&P 500s strongest days occurred during a bear market.”
Since we’ll never know which days will be the best/worst, focus on what you can control – staying calm and staying invested.
Any opinions are those of John Geffert and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
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