Transcript:
Marie Marinovich:
I’m hearing in the news that we are heading towards a recession. What is a recession? And what does it mean to the stock market?
Tom Vaughan:
Okay, yeah, this is a really big deal. The on a very technical terms, a recession is two quarters of gross domestic product, negative right two in a row. And, but in a more generic sense, it just means the economy slows down to a point where it is no longer growing, it is actually shrinking in terms of our gross domestic product, right. So that that’s what we’re looking at there. And the reason it’s important to focus on is because it can have a pretty dramatic impact on the stock market. So we have all of these downturns they happen on a fairly regular basis. If there is a downturn, and there is no recession that happens, you know, with or right after that downturn, it only drops 15%. On average, we’re down 18%. Now, so we’re kind of in that range. And the recovery time is quite quick, about four months is the average recovery time.
If you look at and this is since World War Two on the S&P 500, if you look at those downturns where there was a recession, either concurrently happening or happening shortly thereafter, then you end up with a scenario where the market’s average drop is 36%, which is double from where we are now, right. And the recovery time is over 50 months, on average, much different scenario. And that’s why when I see recessionary pieces come through, and it’s not happen very often, but 2008, that happened 2000 had happened, right. And so when you get these situations, you probably need to get a little defensive, you need to, in my opinion, need to hang in there on the market, until you get some more definitive proof that you’re going to have a recession, because if you start getting defensive, and there’s no recession, the market could shoot right back up, and you’re going to lose some of that bounce, which can be incredibly important. So it so that’s, that’s, that’s why it’s important to the stock market, it really just means in a very pure sense, that earnings will probably be falling from where they were, companies make less money and recessions as a whole.
And an earnings are the ultimate driver of the stock market. So you’ve got, you know, the scenario where the markets always looking forward trying to guess when that next recession is. And basically, you know, because of what can happen to the earnings segment, I want to reduce the price of the stock to reflect the fact that the earnings might be coming down. And so that’s that’s the overall scenario there. It’s, it’s not rocket science, but it is kind of interesting. What is rocket science is trying to figure out when the next recession is, you know, that’s not an easy thing at all. I really like using the leading economic indicators LSI basket of 10 indexes that was put out by the Conference Board. If you go back to 1960. And look at that chart, there’s never been a scenario where the LTI hasn’t been falling prior to a recession, or at least going sideways, like it was in 2020. And right now, we’re still going up, we’ll get the new LTI number for April shortly.
So we’ll see what’s happened in April, but we’re still going up there. And so that’s one of the things I’d really like to see, you know, curling down before I start to think about the possibility of recession, we got a very hot economy, we got a lot of reasons for the Federal Reserve to push down on that economy and try to slow it down. You know, so the hope is that the economy is so hot, they can still push on it and still have room for you know, what they call a soft landing, which is just you know, doesn’t create a recession. But that’s the big debate right now, believe me within the Wall Street Community, everybody’s debating recession, no recession, you know, that kind of thing. And so it’s it’s a it’s an interesting question.