What does this mean for the stock markets
The US economy has contracted for two consecutive quarters, plunging it into a technical recession. Equity markets are likely to behave differently now, creating new opportunities for investors.
The forward-looking behavior of the equity markets means that the broader equity markets have already paid the price for this slowdown at the start of the year, and have now started to rally. In the past month, the S&P 500 (US500) and Nasdaq 100 (US100) gained 7% and 9%, respectively.
During recessions, stocks in the energy and consumer sectors are likely to face devaluation as they begin to report lower sales numbers. While tech stocks are likely to recover, as the market rushes to buy quality stocks at discounted prices. As reflected in the rally of Apple (AAPL), Alphabet (GOOGL) and Microsoft (MSFT) stocks in recent weeks.
Nasdaq 100 (US100) Price Chart
Are we in recession?
Although there is no official definition of a recession, the general rule of thumb is that an economy is in recession when its GDP contracts for two consecutive quarters. The US economy contracted 1.6% during the first quarter of 2022 and 0.9% during the second quarter, putting it in a technical recession.
Why it hasn’t been officially announced yet, says Capital.com analyst David Jones. down for.” He adds that “some would point to the fact that there is no high unemployment, but to me, the US is in recession – we can’t change the rules as we move forward”.
Why is the stock market rising?
Although the economy has been shrinking during the first half of 2022, the stock market has been leaning in recent months. The S&P 500 (US500) and Nasdaq 100 (US100) gained 7% and 9%, respectively.
This is due to the fact that the equity markets are forward looking. Investors had already started to price in a potential bearish early in the year when the stock market started selling.
As Jones puts it: “Indices like the Nasdaq are down about 20% this year and are anticipating an ongoing economic slowdown.”
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Now that the contraction has happened, the equity markets have changed. Jones says the catalyst for this may have been decisions made by the Fed: “With the narrative surrounding this week’s Fed meeting suggesting that interest rates may not be rising as aggressively, it appears investors have taken the risk of raising interest rates as aggressively as possible.” It has taken some heart.”
To investors he says: “The real test of the indices now is when they are sold out – how deep do they go? If indices such as the S&P 500 remain above year’s lows, the market appears to be in ‘buy dips’ mode once again.
S&P 500 (US500) Price Chart
How will the different regions behave?
Although the broader equity markets are rallying, different segments of the stock market create different opportunities for investors as the economy moves through new cycles. Some key points to note for all market watchers:
- In anticipation of a recession, equity investors typically run into defensive areas, such as Consumer staples, industry and healthcare, as researched by SSGA. After the slowdown in the economy, the pace of growth in these sectors is likely to slow down. In fact firms like Walmart (WMT), Coca Cola (KO) and Kraft Heinz (KHC) outperformed the market at the start of the year, only to see their prices fall in recent months.
- Once a recession approaches, investors tend to buy stocks in industries such as energy, a sector that historically benefits from inflation that precedes recessions due to its ability to pass on costs to customers. TotalEnergies (TTEF), Chevron (CVX) and ExxonMobil (XOM), Shell (RDSa) and BP (BP) all outperformed the market as they posted historically high revenue during the most recent quarter. As the slowdown continues, the energy sector could pose a small opportunity as demand slows. Jones comments: “If the downturn continues I expect the energy market to fall back, which will generally affect the share price of these companies.” However, due to the unique supply constraints seen in recent months due to the Russo-Ukraine War and supply chain disruptions, there may be a chance that the energy sector may yet collapse.
- only during a recession, it’s technology and financial Sectors that take the hit. This is when the market begins to price borrowing and disposable income decrease. JPMorgan (JPM), Goldman (GS) and Morgan Stanley (MS) all saw their stock prices lower after disappointing earnings during the second quarter of 2022. It’s a similar story for tech stocks though. Jones adds: “If investors accept the risk once again, some of the high-tech companies that have been particularly hard hit in the past 8 months could see a decent recovery.” Tech stocks like Apple (AAPL), Alphabet (GOOGL) and Microsoft (MSFT) have started to rise slightly after seeing a huge selloff a few months back.