The stock market has annoyed a lot of people this year. In January to mid-February, it was at all-time highs and seemed like it was overheating. Then, it had a historic crash. Then, it had a historic recovery. Now, it’s back around all-time highs.
With that kind of volatility, basically anyone made any prediction has been proven wrong. For a lot of really smart people who own hedge funds, some have had historically bad performance. Worse yet, they’ve gotten beaten out by a bunch of people on the internet buying random stocks because someone made a funny meme about them.
There is a lot to unpack here. So, maybe we can look into one related development that some people have found annoying. If the economy is doing poorly and is in a recession, why are stocks doing well?
If we look at the S&P 500 historically on a yearly calendar return basis and highlight any year that had even one month in recession, we can visually identify an interesting pattern. While it’s true that the market tends to do poorly around recession years, it actually tends to do pretty well in the last year of each recession. In fact, just counting up the shaded regions here, it appears that in the last year of 11 out of the last 13 recessions, the market has been positive (often very positive).
If we think about this current recession, we had a really bad quarter in Q2 and a great quarter in Q3. As of now, Q4 looks to be positive. If you go by just GDP then, the recession is already over. It was potentially the shortest recession in US history.
However, the economists in the ivory tower haven’t yet declared that officially and probably won’t do so for a while until they study the data and have rigorous intellectual debate. But, if this year is both the first and last year of a recession, then, following the pattern in the last 11 out of 13 recessions, the market is likely to be positive. That’s what we’re seeing.
While this fourth quarter is looking good, forecasters are already thinking about next year and some concern is already developing about the first quarter of 2021. So, we aren’t out of the woods yet. But, I’m really not sure how much the market will care. Though, I suppose that in a year that no one could predict, it would be foolish to assume anything, wouldn’t it?
While the market has done well the last ten years, this long-term cycle’s returns are lower than the previous two cycles