June 2, 2022
Good morning,
The S&P 500 Index has corrected 18.7% on a closing basis. We’ve looked at 2022 as the Great Unwind (of the massive central bank stimulus of 2020-21) from several aspects trying to gauge how much of the Unwind has been priced into the market. It seems that the stock market has priced in an economic slowdown, but not a recession. Let’s look at previous 18% declines in the market and the recession and non-recession cases that followed, to see what might lie ahead for us now.
The black line shows 18% declines in the S&P 500 that did not overlap with recessions. The blue line shows 18% drops that have overlapped with recessions. The first several weeks look similar as recession fears rise. In non-recession cases, however, the stock market typically spends the next several weeks in a bottoming process. In recession cases, the market has remained on the defensive for multiple quarters.
Under a prepare-for-the-worst paradigm, our focus should be on the blue line. The blue line is the average results of recessionary cases. A severe recession would seem necessary to dramatically underperform the blue line above. A severe recession in today’s recession-or-not environment seems like an unlikely outcome. In sum, can we live with the not-worst-case-imaginable blue line into year-end – certainly as a worse case (from a probability perspective).
Be well,
Mike