Bullish takes and head fakes

These days it seems easy to spin both bearish and bullish narratives for the stock market. That’s because it’s around when a recession is getting underway that there are the most crosscurrents in the data. Key coincident indicators rarely turn down in perfect lockstep, and some will still be rising while the others roll over.

Oftentimes, those bullish stories catch on, driving equity market rallies just when a recession is at hand.

What history tells us about recessions and equity market rallies

We saw such rallies around the beginning of four of the six recessions between the mid-1970s and the Great Recession. The chart shows the performance of the S&P 500 around those recessions –the vertical red line aligns the start dates of the 1973-75, 1980, 2001, and 2007-09 recessions – and highlights double-digit-percent S&P rallies. It also shows the current period (top line).

The 1973 – 75 recession

The 1973-75 recession began in November 1973. Shortly beforehand, equities rallied almost 11% between late August and mid-October 1973. A few months later – between mid-February and mid-March 1974 – stock prices rallied again by 10% (bottom line).

But it wasn’t until eight months later that nonfarm payroll employment started falling, partly because of the “money illusion” in that inflationary era, due to which businesses were focused on rising nominal revenues and were therefore reluctant to lay off their workers. Because our research group has been monitoring economic cycles longer than any other, we can tell you that the consensus didn’t realize that the economy was in recession for the better part of a year after the economy had already entered a recession.

The 1980 recession

Between early January 1980 – when the 1980 recession started – and mid-February, there was a 12?% rally. Stock prices then dropped briefly before turning up ahead of the recovery (fourth line).

The 2001 recession

The 2001 recession began in March, when ECRI affirmed that a recession was “no longer avoidable.” Yet, in the belief that the recession had been headed off by Fed rate cuts, stocks took off in early April and surged 19% in less than seven weeks before turning down in earnest (third line).

The 2007 – 09 recession

Not long after the 2007-09 recession started in December 2007 –– bolstered by the mistaken belief that unprecedented fiscal and monetary stimulus had staved off the recession – equities rallied 12% from a little before mid-March 2008 to just after mid-May (second line). Mind you, even as late as June 2008 – six months inside the recession – real-time data hadn’t shown a single negative quarter of GDP growth. Underscoring this point, convinced that inflation – not recession – was the real problem, the markets also started betting on significant Fed rate hikes that year!

2023 equity markets: par for the course

Having actively monitored recessions and recoveries for our clients over many decades, we appreciate just how hard it is to recognize recessions in real time. Crosscurrents in the data, as well as material data revisions that arrive long after the fact, make it extremely difficult to understand where the economy is in the cycle, let alone where it is headed next.

This helps explain why there have been sizeable equity rallies even in the teeth of a recession. Knowing this, the over-10% rally we saw at the beginning of this year – as well as the S&P’s latest run-up – are par for the course, even with a recession looming.