It’s well documented—the stock market is ignoring the possibility of recession. History shows the gains could just keep coming.
The
S&P 500
is up about 17% so far this year, to about 4500, while the ISM Composite Purchasing Managers Index, a measure of economic activity, was down about 1% for the first half of this year compared with the same period last year. More recently, the
PMI
has risen, but only about 1%.
Higher interest rates, engineered by the Federal Reserve in its attempt to quell economic demand and inflation, are starting to cool the economy.
Most of the time, the market and PMI data move in sync, according to Morgan Stanley. If they were doing that right now, the S&P 500 would be closer to 4000, roughly 12% lower than its current level.
That doesn’t have to happen.
Historically, there have been periods when the market detached from economic data. From the end of 2015 though much of 2016, the S&P 500 gained about 5% while the PMI started out 2016 lower than it was a year earlier. Then, from the midpoint of 2016 to the early 2020 prepandemic record high, the S&P 500 gained more than 60%. The PMI remained above 50, indicating expansion mode, for most of that time.
In the first half of 2017, the S&P 500 gained while the PMI slipped, and then the stock index rose 39% to the pre-Covid high.
The market kept looking through brief periods of economic weakness as the economy continued to grow. Growth of real gross domestic product remained in the low single digits in percentage terms for most years between 2016 and 2020. It took lockdowns that shut the global economy down to ultimately cause a recession.
That dynamic is happening today. The market sees for the moment that a Fed-induced recession just hasn’t happened. Maybe a mild one could happen, but even before it did, the Fed would stop raising rates as the rate of inflation declined, a series of events that would allow economic growth to stabilize soon enough. That’s especially true with analysts expecting demand to grow next year for housing-related industries and consumer electronics, which both had a down 2023, while travel and leisure demand are also expected to pick up.
These are reasons the market gains aren’t actually such a head-scratcher—and why they can continue.
Write to Jacob Sonenshine at [email protected]
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