The US stock market has in recent months defied skeptics and continued its strong run this year even in the face of a severe downslide in the banking sector. There are also the sustained fears of a recession and the prediction of a dark stretch for corporate profits for years.
One explanation that explains the developments is that the situation hasn’t turned out to be as gloomy as predicted. Some experts predict that the worst of the economic pain appears to have been left behind. There are key inputs that factor into the start of a recession. They include jobless claims, capacity utilization, the performance of the manufacturing sector, and market sentiments.
There are indications that while an economic downturn started and indicated a recession, it started in June last year when inflation crossed the 9% mark for the first time in forty years. And it is believed to have boomed out by December 2022.
While there are still indications of weakness in the US economy, as long as it manages to remain above its end-2022 low, the outlook speaks favorably for the S&P Index. The macroeconomic mood seems to have touched the worst phase by end-2022. This indicates that there is likely to be significant support for stocks as we move forward toward the end of 2023.
How Will A Recession Affect The Stock Market
Wall Street experts have been cautioning for months that the US is poised to enter a recession in 2023. But they have not been unanimous about what happens to the stock market if the recession does or does not happen.
Experts have warned of at least a 60% chance of a recession in the next twelve months. The Conference Board Leading Economic Index, a normally reliable predictor of recessions in the past has pointed to a recession that might have already begun.
A dire economic forecast along with inflation that has beaten records of over 4 decades helps explain why the US is in the throes of its worst year since the Great Recession of 2008-9. But not all economists and policymakers are on the same page at the moment. Goldman Sachs has pegged the changes of an economic downturn at just 35%. They are confident that the recession could be avoided altogether.
Following a year when the S&P 500, the benchmark for American stocks, slid by nearly 20%, many investors would love some relief. But experts are cautious and warn that it may be quite early to expect the stock market to surge now. It will only happen when investors have a better sense of the severity and timing of a potential recession.
This is a reality as the economy and the stock market do not move in tandem. They rarely move in an identical direction simultaneously. Instead, the participants in the stock market try to predict economic growth in advance, at times some 12 months ahead.
Thus a low in the era of a market recession could even indicate that t economic downturn is on its way out. While Wall Street continues to be wary of another recession in 2023, it could be months before the first indication of any economic downslide is apparent. This indicates that the fate of stocks will be finely poised in the meantime. And this uncertainty is going to have an adverse effect on the market for some time to come.
The Stock Market And Recession
Given that the stock market predicts an economic development when it comes to the indices, there are differences about whether the stock market has bottomed out in anticipation of a recession-fueled bottom. At its lowest level, the S&P 500 slid by over a quarter in October 2022 right down from an all-time peak that same year.
The selloff last year gave an indication of the risk that the US faces from a recession. And if a recession is inevitable and imminent, investors would have to further lower their corporate profit expectations and also stock market prices.
In the past, the S&P 500 has shown a slide of around 30% during an average bear market. It is generally defined as a period when a stock or stock index falls by at least a fifth from its recent market-high price. And the bear markets mostly overlap with a recessionary phase.
The decline in the last quarter of 2022 failed to reach the threshold of 30%. And the extent of the decline suggests that unless there is a severe economic downturn investors might just have escaped enduring the worst phase of a recession-led market selloff. Experts believe that a fair percentage of bad news has already been factored in and the worst is behind them.
The Changes Of The Economy Sidestepping A Recession
There is always the happy prospect that the economy could totally avoid being caught up in another recessionary phase. There is a fifth of a chance that we could totally avoid a recession if some of the factors normally associated with it do not line up. If the economy strengthened, inflation slides, and the Fed pauses its policy of aggressively hiking its interest rate, recession could be a thing of the past.
And a non-recession phase could be simultaneously followed by a rally that could be as high as 15% to 20% this year. But much of the risk associated with recession is linked to the Federal Reserve’s policy to curb inflation. It has less to do with what is happening in the labor market and various other sectors of the US economy.
What is dicey about this particular stage in the economic cycle is investors continue to look for a reason to either deny or confirm that a recession is a reality in the near future. And thankfully there are clear signs that the worst phase of a recession has been averted. But unless there are clear signs of that, the market will continue to be constrained. Till then there will be a limit to which the stock market can rise.