Recessions, Inflation and the Market

Recessions are generically defined as two negative quarters of Gross Domestic Product (GDP) in a row. Q1 GDP came in negative. However, this substantially overstates the slowdown in economic growth. It was dragged negative mainly from the imbalance between our imports and exports (imports reduce GDP and exports increase GDP). If we just look at consumption and fixed investment, we see growth that is actually faster than the prior two quarters. The economy was continuing to overheat, despite the negative GDP figure for Q1. This is why recessions are “generically” defined as two negative quarters of GDP in a row.

Inflation is a larger concern. It is unlikely that we will have a sustainable rally until there are signs of an inflation peak. That does not necessarily mean that the market will continue to make new lows. It just means we could be range bound until we get more clarity. We will see these signs by watching the Personal Consumption Expenditures Price Index (PCE), Producer Price Index (PPI), Consumer Price Index (CPI) and several others indexes. The market will move up or down as these are reported. It is important to note that inflation is likely to decline to a certain degree on its own due to the supply chain reopening and the end to pandemic-related government handouts.

Since 12.31.1945, the market has declined between 20-40% nine times with an average decline of 27.9%. As of Friday, June 24, 2022 the market low was 23.6%, implying we should be a lot closer to the bottom than the top. Historically, these drops only took 13.8 months to recover with an average return between 20-40%+.