Weekly Update

What if the Recession Has Already Happened?

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Published May 19, 2023

There is no shortage of commentary and hand-wringing about a coming recession. In the piece below, one Fidelity analyst posits that the recession may have already occurred. Here is Denise Chisholm’s analysis:

“Did we already have a hard landing? The National Bureau of Economic Research (NBER) hasn’t officially called a recession, but signs suggest that we may have already had a fairly bad one. One of the most consistent recession indicators has been a contraction in real wages (adjusted for inflation), which happened in every recession since 1962 except the 2020 COVID shutdown (chart hereunder). Real wages declined throughout 2022—falling more than they did during the Great Recession—as inflation outpaced wage growth. Real wage growth may have bottomed last fall; a rebound could provide a tailwind for the economy and the stock market.

Real wage growth may have bottomed

In severe recessions, stocks and real wages have recovered together The 2022 contraction in real wages is on par with past “hard landing” recessions: 1970, 1980, 1982, 1990, and 2008. In those recessions, stocks started recovering around the same time that real wages hit bottom (see chart below). The S&P 500 appeared to be following this pattern through January. By contrast, in “soft-landing” recessions (1967, 1995, 2011), stocks maintained an upward trajectory as the market looked beyond the trough in real wage growth.

After hard landings, stocks have tended to rebound with real wages

Stocks historically have rebounded before real GDP hit bottom. The past year also looks recessionary based on inflation-adjusted gross domestic product (GDP). In previous recessions, the stock market typically started to recover before real GDP growth bottomed. (Since 1960, the only exception occurred in 2001 and 2002, as the market worked off excessive valuations.) Twelvemonth real GDP growth dropped below 1% in the fourth quarter of 2022, a level consistent with real GDP growth around the start of many recessionary stock market recoveries.

Stocks usually have recovered before real GDP growth

Cyclicals have led after weak real GDP growth Historically, big declines in inflation-adjusted GDP growth have set the stage for leadership by economically cyclical sectors. Since the late 1950s, in 12-month periods after year-over-year real GDP growth was below 1%, consumer discretionary had a 95% chance of outperforming the market, and financials, industrials, and materials had 72% odds of outperformance.

Cyclicals have tended to lead after weak real GDP

CND = Consumer Discretionary; CNS = Consumer Staples; IND = Industrials; MAT = Materials; HTH = Healthcare; ENE = Energy; TEC = Technology; FIN = Finance; UTL = Utilities

If cyclical sectors, and Consumer Discretionary in particular, tend to lead the way higher for stocks, where does this group stand? The chart below shows that the downtrend has been halted so far this year, but a break higher has yet to occur. This week, the rise in tech shares appears to have lit a fire under Discretionary stocks. We will see if it can last.

Downtrend has been halted so far this year


Market Update

Investors were set to receive earnings reports from retailers this week with debt ceiling talks as a background source of worry for markets. Monday saw a +0.3% uptick in stocks with interest rates also rising. A modestly positive retail sales report kicked off Tuesday’s session while Home Depot reported its first annual sales decline in fourteen years. However, the Home Depot sales drop comes after a monumental surge in consumer home improvement spending during the pandemic and subsequent surge in home prices, which lessens the sting of the news somewhat. Stock indexes slid -0.6%. A report of growing bank deposits at one of the beaten-down regional banks, Western Alliance Bank, kicked off Wednesday’s market optimism. An earnings beat from Target countered the previous day’s sour Home Depot news. While positive comments from President Biden on the progress of debt ceiling negotiations accelerated the buying. The S&P 500 closed the day up +1.2%. Walmart lifted its earnings outlook Thursday. Heavyweight tech stocks ripped higher again as semiconductor and software shares surged. Positive debt ceiling comments from Speaker McCarthy furthered the market’s optimism around the negotiations. Buyers were out in force Thursday pushing the market higher by +0.9% to close above its trading range of the past two months and leave the S&P 500 at its highest close in nine months. Friday brought a slight step back ahead of the weekend with stocks off -0.1%. Shares of Nike slumped as retail shoe company Foot Locker warned of soft sales. But it was a strong week for the bulls with the S&P 500 breaking out its range to the upside, regional bank shares posting a strong rebound, and several leading tech companies hitting record highs.

After six weeks of flat trading for the S&P 500, the index finally made a more decisive move, and it was higher. This week, the index popped upward by +1.71% to close just below the widely-watched 4200 level. The Nasdaq 100 (QQQ) doubled that performance this week rising +3.52%. Smallcaps remain the only one of the three indexes to trade near the bottom of their year-long range, this week rising +1.93%.

Warm wishes and until next week.