Impact of Recession on Stock Market: Latest Figures and Data

The stock market has been a subject of intense scrutiny in recent times, with concerns about a potential recession looming large. Despite the ongoing bullish run, investors and analysts are grappling with the possibility of a downturn. In this article, we will delve into the latest figures and data to understand the impact of recession on the stock market.

Current Economic Indicators

• Consumer Spending and GDP Growth: In the second quarter of 2024, consumer spending added slightly less than 2% to GDP growth, with increases in both goods and services activity. This moderate growth indicates that the economy is still robust, but it also suggests that there are underlying challenges that could potentially lead to a recession.
• Job Market Performance: The job market has been a mixed bag. The September jobs report showed a strong addition of 254,000 jobs, exceeding economists' expectations of 147,000. However, this positive headline number is tempered by concerns about the growing ratio of government jobs to private jobs, which tends to increase in recessionary environments. Additionally, the share of consumers who say a job is hard to find is near 20%, and job openings, new hires, and quits data all indicate a broadly slowing labor market.

Stock Market Performance

• Bullish Run and Market Valuations: Despite recessionary fears, the stock market has continued its bullish run. The S&P 500 index has surged, reaching multiple new record highs, with investors directing over $20 billion into funds that invest in U.S. equities. This optimism is largely based on confidence that the Federal Reserve will tame inflation and that the US economy will remain solid. Analysts at Goldman Sachs and Fundstrat have adjusted their year-end stock predictions upward, projecting additional increases in the S&P 500 index.
• Market Volatility and Corrections: However, the market has experienced significant volatility in recent months. In early August, the S&P 500 neared correction territory, dropping 8.5% from its July peak, and the NASDAQ Composite Index experienced a correction, down 13% from its July high. This volatility is not uncommon and often presents opportunities for skilled investors to add fundamentally sound stocks at "sale" prices.

Recession Risks and Concerns

• Valuation Metrics: One of the primary concerns is the high valuation of the S&P 500. According to Jon Wolfenbarger, founder of BullAndBearProfits.com, 19 out of 20 valuation measures monitored by Bank of America are overvalued. The S&P 500 Market Cap to GDP ratio is currently 147% above its historical average since 1964, indicating a significant risk of a downward spiral if a recession were to occur.
• Fed's Monetary Policy: The Federal Reserve's (central bank) recent reduction in interest rates has been a significant factor in the market's upswing. However, the Fed's cautious approach to cutting rates to avoid reigniting inflation has tempered expectations of further rate cuts. This cautious stance could impact the market's momentum and increase recessionary fears.

Conclusion

The impact of recession on the stock market is multifaceted and influenced by a variety of economic indicators. While the current bullish run is driven by confidence in the Fed's ability to control inflation and the economy's robust performance, underlying concerns about high valuations and slowing job market trends cannot be ignored.