What Muddling Through Might Look Like

Posted by Jeffrey Buchbinder, CFA, Chief Equity Strategist

Wednesday, January 11, 2023

The consensus sees a U.S. recession coming in 2023, though opinions vary widely on how significant it might be. LPL Research acknowledges that a recession this year is probably more likely than not at this point, and the risk of another tough year for stocks shouldn’t be ignored. But what if the U.S. economy muddles through on the back of a resilient consumer who is still flush with cash? Dare we say, what if it is different this time?

Looking back at recent growth scares, we see the odds do favor recession. One way to look for a scenario in which markets feared recession that did not occur is by using the Institute for Supply Management (ISM) Manufacturing Index. The index has leading characteristics because it is based on a survey of purchasing managers’ expectations for the future.

As shown in the LPL Chart of the Day below, this indicator did signal economic contraction in the mid-1980s, mid-1990s, and 2011-2012 while the economy avoided (another) recession:

  • After the double-dip recession in the early 1980s, stocks were flattish in 1984 before the S&P 500 rallied 26% in 1985 (likely helped by a merger wave and perhaps some tax cut speculation).
  • Aggressive Federal Reserve (Fed) rate hikes in 1994 that triggered the Mexican peso crisis later that year, held stocks back in 1994 before four consecutive years of solidly double-digit gains from 1995-1999.
  • The U.S economy avoided recession after the Standard & Poor’s downgrade of the U.S. credit rating in August 2011 and European debt crisis in 2011-2012. After a flat 2011, the S&P 500 gained 13.4% in 2012 and 29.6% in 2013.

View enlarged chart

There are other ways to measure growth scares. One that suggests the odds of recession in 2023 are very high is the Leading Economic Index. This index, composed of 10 indicators that when combined offer clues about where the economy might be headed, is currently telling us recession is inevitable based on how much it has dropped over the past six months. Like the ISM, there have been some recession signals, albeit not strong ones, that were not followed by an official downturn. The accompanying chart shows mid-1960s, late-1980s, mid-to-late 1990s (there’s that time frame again), and 2016.

  • The S&P 500’s 13% decline in 1966 (-13.1%) was followed by a 20% rally in 1967.
  • Stocks rallied double-digits in 1988 and 1989, rebounding nicely after the 1987 crash despite the oncoming savings & loan crisis in 1990 that saw stocks dip 6%.
  • And while muddling through doesn’t do it justice, the late 1990s stock market boom—on the back of the internet buildout—occurred partly because recession was avoided despite currency crises in Russia, Southeast Asia, and Latin America.

View enlarged chart

One constant during these periods discussed above was consumer spending grew through most of these growth scares. The chart below highlights the 2010 and 2011 period, where resilient consumers prevented the economy from a double-dip recession and helped spark the stock market’s strong rebound in 2012. Consumer spending did stall in the mid-1980s in a mid-cycle pause but grew solidly throughout the bull market of the 1990s, despite those growth scares.

View enlarged chart

Finally, it’s worth again reminding our readers that stock market rebounds following bear markets have been powerful historically. The S&P 500 has bounced back an average of more than 20% within 12 months of coming out of bear markets.

Looking at just the last seven bear markets since the 1987 crash, we have seen the market bounce back an average of 43.6% after dropping 33.1%. LPL Research expects the S&P 500 to produce double-digit gains in 2023, which seems quite reasonable based on this analysis.

View enlarged chart


Should this economy just be experiencing a growth scare, stocks should have nice upside from current levels. As discussed in Outlook 2023: Finding Balance, LPL Research maintains a positive stock market view. Inflation should continue to decline, leading to an end to Fed rate hikes this spring, keeping interest rates in check, and buoying corporate profits. Two consecutive down years for the S&P 500 is quite rare, having occurred only three times in the past 80 years (1973-74 and 2000-01-02). The year after midterms has seen stocks rise every time since 1950 (average S&P 500 gain of 14.7%). LPL Research continues to see double-digit gains for the S&P 500 this year. Beyond inflation and the Fed, geopolitics remain a key risk.


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