The Truth is Powerful
Quick shot: Markets are not the economy
Constant talks and headlines in the news about an impending recession may sound alarming. But as you consider the implications of higher recession risk for your long-term portfolio, it’s important to remember that the stock market and economy move at different speeds.
History has shown us that the stock market almost always bottoms well before the economy hits its worst point during a recession. Why? Markets are forward-looking machines – they anticipate what may happen in the future, not necessarily what’s happening today. Think about a soccer goalie. When someone is about to take a shot on goal, the goalie anticipates where the ball may be going. Most of the time, the goalie ends up in the place that the ball is headed before the ball even gets there. Other times, they may incorrectly anticipate the direction of the soccer ball and end up blocking the wrong spot.
Note that GDP, or the measure of economic output, is a backward-looking indicator. If we pull on the same metaphor, it’s the score of the game that already happened.
Looking at recessions dating back to 1957, on average, the S&P 500 bottoms three months after a recession begins but 10 months before the recession […]