Lately we have heard a tremendous number of people predict of a coming recession. Actually, predict isn’t even the right word in some cases. We see regular references from those outside the finance industry simply assuming we are in or near a recession. Perhaps they are listening to some influencers or understandably shaken by the rising prices around them. Meanwhile based on how packed airports and restaurants are consumers are not living as if they think there is a recession coming.
It is certainly possible a recession develops and we will show what that might mean for stocks. However, we believe it is important to stay open minded to various outcomes. Data we have been reviewing and our first chart indicate we might just be returning to normal after a truly insane couple of years.
Notice below how for the ten years prior to the pandemic GDP was generally a little over 2%. That is also what current estimates are for this year and next. The economy worldwide went through an extreme shut down and then surge reopen never seen before. The implications for supply chains and nearly all aspects of business have been unprecedented. Is it possible things are in a not so smooth manner trying to get back to normal?
Source: Truist IAG
Certainly, there are enough legitimate concerns right now that a recession can’t be dismissed even if it feels like it would be the most predicted recession ever. What might happen to the stock market in a recessionary period? Of course, every period is different with some being much worse, but the median and average stock price decline around recessions is 24-29% as shown below. At the recent worst for the S&P 500 stocks were down about 19%.
Source: Truist IAG
What should not be ignored from this chart is the enormous returns that typically come in the 1–2-year period after stocks trough. The gains usually come quickly with investors remaining skeptical and apprehensive to participate. Missing out on these eventual gains can be difficult to overcome both financially and emotionally.
It is very difficult and perhaps impossible to know when a trough in stocks comes, especially when a recession is involved. At Parallel we believe it is best for investors to be open minded to different potential outcomes while remaining disciplined in their investing approach.