Business

Is the stock market already pricing in a recession? What the S&P 500’s tumble shows.

What would the stock market likely cost if the US entered a recession?

That’s an important question on the minds of investors as the Federal Reserve works to drastically raise interest rates in an effort to stamp out painfully high levels of inflation, a quest that Fed Chair Jerome Powell warned about in August that affected households and corporations. could harm.

Analysts often point to the fall in stocks this year as evidence that a recession has already been ‘priced in’, often without knowing exactly what that entails.

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To get some meat on the bone, Oxford Economics gathered historical data and found that the S&P 500 index’s SPX,
-0.72%
a decline of about 24% (see chart), from the peak to mid-June, seems in line with the “mild” recessions in the US of the past 15 years.

Of these, the stock market’s average decline was 34%, while severe recessions, such as those in 1973 and 2001, caused an average decline of about 43%.

Stocks have fallen 34% on average during recent US recessions.

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Oxford Economics, Refinitiv, Bloomberg

“Of course, stocks have already appreciated somewhat in a recession, and we think this should limit the magnitude of further losses,” Daniel Grosvenor, director of global equity strategy at Oxford Economics, wrote in a note on Wednesday.

His team expects a mild recession this time, marked by a rise in the unemployment rate of less than 3%. The unemployment rate was set at 3.75% in August, the highest in six months, but still the tightest labor market in modern times.

To seeJPMorgan exec sees roughly 50% chance of ‘mild’ recession and sees chance to hire laid-off bankers

“Anyone can select the data to confirm their previous beliefs, and investors are ‘put on hold’, wondering whether the recession is underway, already over or will be in the future,” said Vincent Deluard, global macro strategist at StoneX, in a customer note.

While healthcare has been the best performing sector in past recessions, he thinks energy CL00,
+0.34%
and cyclical sectors should outperform in the next.

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“Conversely, utilities and bond proxies will fare poorly as inflation and rates will remain elevated during the next recession,” Deluard said.

Read: Here’s the good news when there’s a recession — nearly half of the Fortune 500 was created in times of economic stress, Morgan Stanley says.

US stocks gained on Wednesday after the S&P 500, Nasdaq Composite Index COMP,
-0.90%
and Dow Jones Industrial Average DJIA,
-0.45%
on Tuesday recorded their worst daily percentage declines since June 2020.

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