Posted by George Smith, CFA, CAIA, CIPM, Portfolio Strategist
Tuesday, August 2, 2022
LPL Financial held its FOCUS conference at the Colorado convention center in Denver, CO from July 24-27. LPL Research was proud to be part of this annual event that allows thousands of LPL’s financial advisors to experience industry-driven sessions elevated by the extensive knowledge and experience of LPL executives, industry leaders, and dynamic guest speakers. “LPL Research had the pleasure of speaking directly with many advisors during the FOCUS conference,” said LPL Financial Portfolio Strategist George Smith “recession risks are clearly front of mind as we answered many questions on this, among other interesting topics”. We wanted to share some of the most frequently asked questions about the state of the economy and the answers we gave during those conversations:
- What is the “correct” definition of a recession? Are we in, or going into, a recession?
The National Bureau of Economic Research (NBER) looks for economic declines that are significant, broad-based, and persistent. Or, to use the terminology of the NBER business cycle dating committee, the three criteria are “depth, diffusion, and duration.” We are probably currently not in a recession. At least not yet. Consumer spending was too strong in Q2 to satisfy the requirements of a significant, broad-based, and persistent contraction. Recession risks however are rising, with recent increases in unemployment claims as an ominous sign. For more details, please see our recent “Are We In A Recession Yet?” blog.
- How long is the average recession? How long is the average expansion after a recession?
Since World War II (WWII) the average recession has lasted 10 months, although 2020 was the shortest on record at just 2 months, and is followed by an average expansion of 64 months. We are currently 27 months into the expansion that started in May 2020. If the economy does fall into a recession within the next 7 months this expansion will be the 3rd shortest since WWII (with only the early ‘80s and late ‘50s expansions shorter).
Indexes cannot be invested into directly. performance referenced is historical and is no guarantee of future results.
- How does the stock market react to recessions?
Somewhat surprisingly, stocks have actually gained ground in half of the recessions since WWII. The S&P 500 gained 1.3% on average when looking at the 12 previous recessions, with a very impressive median advance of 5.4% (the average is skewed lower due to the large drawdown in 2008). The last 3 recessions, however, have all led to stocks declining.
Indexes cannot be invested into directly. performance referenced is historical and is no guarantee of future results.
- When do stock markets bottom during recessionary periods?
Stocks tend to lead the economy with all but one recession since WWII seeing stock markets bottom before the recession officially ends (remember NBER calls the end of a recession with about a year delay). This was even true during the COVID-19 related recession that only lasted 2 months. The only exception was in 2002 when the market bottomed 11 months after recession ended.
- What would it take for the Federal Reserve (Fed) to be more aggressive / less aggressive?
We continue to think the Fed will likely increase rates this year up to approximately 3.5% as long as inflation pressures persist and the labor markets hold steady. The Fed’s next monetary meeting is not until September by which time the Fed will have two more months of inflation and jobs data to mull over. At that point, if inflation is stubbornly high, with some sectors yet to decelerate, and a still strong jobs market, then the Fed would likely continue to aggressively tighten financial conditions. If inflation does cool, even marginally, and businesses are significantly increasing layoffs to cut costs in response to a weakening economy then this could lead to a much less aggressive Fed. In that case, the Fed could begin cutting rates again as early as 2023. We still expect a 50 basis point hike in September but that will be very dependent on the economic data we get over the next two months. For more details, please see our recent “Fed Meeting Recap” blog.
In tomorrow’s blog we will take a look at the most frequently asked questions that we answered at FOCUS 2022 in relation to equity and fixed income markets.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
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All index and market data from FactSet and MarketWatch.
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