Many analysts are predicting that the U.S. economy may tip into a recession later this year as a result of the Fed's interest rate hikes. Investors may worry about the stock market sinking after a recession is officially announced. But history shows that markets don't wait for official announcements. Instead, they incorporate expectations ahead of economic reports.
The global financial crisis offers a lesson in the forward-looking nature of the stock market. The US recession spanned from December 2007 to May 2009, as indicated by the shaded area in the chart below. But the official “in recession” announcement came in December 2008 — a year after the recession had started. By then, stock prices had already dropped more than 40%,2 reflecting expectations of how the slowing economy would affect company profits.
Although the recession ended in May 2009, the “end of recession” announcement came 16 months later (September 2010). US stocks had started rebounding before the recession was over and climbed through the official announcement.
The takeaway: The market is constantly processing new information, pricing in expectations for companies and the economy. Investors who look beyond after-the-fact headlines and stick to a plan will be better positioned for long-term success.
US Recession and Stock Performance During the Global Financial Crisis1
S&P 500 INDEX, JANUARY 2007 - DECEMBER 2010
Past performance is no guarantee of future results. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.
In US dollars. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
David is the Co-Founder and Chief Investment Officer of Rappaport Reiches Capital Management. He acts as personal CFO to entrepreneurs and corporate executives, providing organization and clarity in their finances. Please connect with David below. He loves to talk about investing, financial planning, and Aspiritech, a non-profit hiring individuals on the autism spectrum.