Stocks rallied on Thursday even after the U.S. economy posted its second consecutive quarter of negative growth which technically translates into a recession– historical data shows markets are likely to continue moving higher in the short-term with the understanding that investors have already priced in the bad news.
Stocks initially fell following the release of second-quarter U.S. GDP numbers, which showed the U.S. economy shrank at an annual rate of 0.9% following a 1.6% drop in the first quarter.
Markets rebounded later on Thursday, however, with experts widely remaining unconvinced that the economy is in a true recession at this stage, citing strong job growth and solid consumer spending.
Historical data shows that markets usually tend to move higher in the weeks immediately following a second consecutive reading of negative GDP growth; that’s because most investors believe the worst is over for stocks before it’s over for the rest of the economy.
Since World War II, whenever GDP numbers hit a second straight quarter of declines, the S&P 500 gained an average of 1.3% over the next week, rising over 80% of the time, according to data from CFRA Research.
Stocks rose an average of 0.8% two weeks out, while rising 60% of the time during that time period as well as over the next month, CFRA data shows.
The trend is the result of investors anticipating and pricing in bad news before it happens: “Wall Street does not like uncertainty” and once it’s removed, investors are more confident—even in the face of more gloomy data down the road, explains Sam Stovall, chief investment strategist for CFRA Research.
“Two successive quarters of GDP decline are not necessarily death knells for the market because a lot of assumptions were already priced in ahead of time,” says Stovall. Investors are “usually nervous” in the periods leading up to big economic news or a Federal Reserve interest rate decision, he adds, but then once the news is out, investors are more likely to buy back shares.
A similar phenomenon has occurred with Federal Reserve rate hike decisions so far this year. On all four occasions when the central bank announced increases in 2022, stocks surged higher, cumulatively rising more than 7% on the days when the Fed announced their interest rate decisions, according to recent data from Bespoke Investment Group.
Though many analysts still believe the U.S. economy is yet to fall into a recession, most agree that the jury is still out on whether a downturn can be avoided later this year and in 2023 amid a “dicier” outlook. There have been 13 recessions in the post-World War II era, with three in the 21st century (2001, 2008 and 2020), according to the National Bureau of Economic Research. In over half of the 13 years with recessions since 1945, however, the S&P 500 has posted positive returns, since markets tend to bottom out before the end of an economic downturn, and then rebound strongly.