It is a question asked by RBC today.
Stocks Have Ignored A Recession Once Before
One of the things that’s jumped out in our recent meetings with US equity investors is how many have asked us whether the stock market has ever bottomed before a recession actually got underway. We’ve generally been highlighting our belief that the S&P 500 priced in a recession at its October 2022 low when it had fallen roughly 25% from its January high, just shy of the median recessionary drop in the index dating back to the 1930s of 27% (page 3). Fears that aggressive tightening by the Fed would drive the US economy into a recession were a clear catalyst for that move lower. The price action in Small Caps last year also makes us think the October low in the S&P 500 priced in a recession. Over the summer of 2022, Small Caps also appeared to price in a recession when the Russell 2000’s forward P/E returned to just over 11x (historically the Russell 2000’s P/E bottoms in the 11-13x range, page 55) and Small/Large relative returns moved back to levels that were consistent with a drop in ISM manufacturing into deep, contractionary territory.
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