Major stock market indices downturns are almost always accompanied by a recession.
What about the current sell-off in stocks?
Does it mean investors believe a recession is imminent or that it’s a much-needed reversion to the mean after a few years of outperformance?
BCA Research examines those questions in this brief executive summary, which is essentially the hi-lights of a more in-depth report for its clients.
Pay special attention to the chart showing the links between bear markets and recessions going back to 1970.
by Peter Berezin, Chief Global Strategist, BCA Research
- The golden rule for investing in the stock market simply states: “Stay bullish on stocks unless you have good reason to think that a recession is imminent.”
- The catch, of course, is that it is difficult to know whether a recession is lurking around the corner.
- Still, we can learn a lot from past recessions. As we document in this week’s report, every major downturn was caused by the buildup of imbalances within the economy, which were then laid bare by some sort of catalyst, usually monetary tightening.
Today, the US is neither suffering from an overhang of capital spending, as it did in the lead-up to the 2001 recession, nor an overhang of housing, as it did in the lead-up to the Great Recession.
- US inflation has risen, but unlike in the early 1980s, long-term inflation expectations remain well anchored. This gives the Fed scope to tighten monetary policy in a gradual manner.
- Outside the US, vulnerabilities are more pronounced, especially in China where the property market is weakening, and debt levels stand at exceptionally high levels.
- Fortunately, the Chinese government has enough tools to keep the economy afloat, at least for the time being.
Equity Bear Markets And Recessions Go Hand In Hand
Equity bear markets rarely occur outside of recessions. With global growth set to remain above trend at least for the next 12 months, investors should continue to overweight equities.
However, they should underweight the tech sector since tech stocks remain disproportionately vulnerable to rising rates, increased regulation, and a retrenchment in pandemic-induced spending on electronics and online services.
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