Recessions and stock markets

With the discomfort experienced last year, questions around a recession—are we already in one or will we enter one—seem to be the most pressing this year.  

Professional economists forecast the possibility of a recession at a higher rate than anytime over the past decade and Google searches of the word “recession” hit an all-time high last year.  

The Good News 

If a recession does come, it will happen with a backdrop that includes a historically strong employment market, which would hopefully bring about a less severe, shallow recession. 

The employment market is only one piece of evidence that counters the recession narrative. There are others as well, which include: 

• LVMH (parent company of Louis Vuitton, Tiffany & Co, Fendi) reported record numbers in the first nine months of last year. Consumers are spending aggressively on luxury items. 

• Airline fares, up 28% versus last year represent the second fastest growing category in the inflation index (behind fuel oil), and travel demand has soared despite the cost.  

These results do not necessarily feel like a recession. However, we note that the data is lagging and captures what has already happened. It’s possible the environment could be much different six months from now, emphasising that it’s not possible to predict outcomes, but that taking a long-term view is key to being adequately prepared.

From an investment standpoint, we take solace in the fact the stock market and economic cycle don’t move in unison. The worst performance of the stock market is usually observed in the 12 months leading up to a recession rather than during the recession itself. There have been exceptions, but markets generally tend to be forward-looking while economic data is backward-looking. 

Let’s not forget lessons from recent history. Only two years ago we had an economic deterioration while the stock market moved higher. It’s certainly possible the same thing could happen again this year. 

We are hopeful 2023 will be a smoother ride than 2022. But we are confident that together, we can navigate whatever the future holds, and we look forward to supporting you throughout the journey.