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Are Stocks Warning About A Coming Recession?

Are Stocks Warning About A Coming Recession?

March 10, 2020
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In just 13 trading days, the S&P 500 Index pulled back nearly 19% from its recent all-time highs, making this the fastest such move in stock market history. We all know why this happened, as concerns over COVID-19 (coronavirus) and potential economic fallout continue to grip investors around the globe.

The big question now is: Will a potential bear market in stocks usher in a recession? After all, stocks tend to lead the economy both into and out of recessions. “History tells us that the worst bear markets have taken place during a recession,” said LPL Financial Senior Market Strategist Ryan Detrick. “Now the good news is not all bear markets occur in recessions; in fact, when the economy has avoided recession, stocks have bottomed right around down 20% over the past several bear markets.”

As shown in the LPL Chart of the Day, stocks have dropped 37% on average in bear markets during a recession, while they have lost 24% if a recession is avoided. Additionally, five of the past six non-recessionary bear markets saw stocks bottom between 19% and 22% lower, with December 2018 being the most recent case. The only time stocks saw a larger decline without a recession was in 1987, but don’t forget that stocks were historically stretched heading into that bear market, with the S&P 500 up more than 40% year to date in August 1987.

So, does LPL Research see a recession coming in 2020? Although the odds have increased significantly over the past two weeks, at this time we do not see a recession in the United States. We acknowledge the uncertainty, but at this point in time we expect economic growth to accelerate during the second half of this year as the coronavirus is contained.

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