The good news for U.S. stock traders is that expectations of a U.S. recession are almost fully priced in. But the bad news: if history is any guide, it’s not a 100% guarantee.
With the S&P 500 down regarding 19% to 3,901 from its all-time high on Jan. 3, the market has effectively priced in a 60% to 75% decline, according to a new analysis by Truist co-chief investment officer Keith Lerner. Recession possibility.
Lerner uses historical averages and median declines in pre- and post-recession estimates dating back to 1948,S&P 500 IndexThere is room for a 7% to 13% downside from current levels. He noted that historically, the index has lost an average of 29% during recessions, with a median decline of 24%.
“This will make an already incredibly brutal market feel worse. Of course, the market might also perform better than average,” he warned.
Some historical perspectives matter now, as portfolios continue to be hit by a host of concerns. Examples include persistent high inflation levels, the hawkish Federal Reserve and retailer Walmart (WMT-US), Target (Target) (TGT-US) and Ross Stores (ROST-US) poor financial report.
S&P 500 IndexLast week posted its longest weekly drop since the dot-com bust. At the same time, other major indexes also fell in sync.
Nasdaq Composite IndexDeeper into a bear market, tech-focused stocksthat fingerIt is down 30% from its all-time high on January 19, 2021.AlthoughDow JonesThe Industrial Average has yet to join the bear market, but it is in the midst of a correction, falling more than 10% from its highs.
Lerner offered a small bright spot for troubled traders: “Once a stock hits lows during a recession, the average one-year forward return is 40%.” “In other words, even if a stock falls to 3400, extrapolating the average return, would put the index at 4800. Another thing to keep in mind is that stocks tend to bottom out a few months before a recession ends, and usually at the peak of pessimism. And investors were thinking, ‘I don’t see a reason for the market to go up, all the news is negative.'”
Therefore, in the current environment, it may be better to remain optimistic.
