Is This Normal? Stock Market Performance During Recessions - Adviser Investments

Is This Normal? Stock Market Performance During Recessions

June 17, 2020

Episode Description
Featuring Jeff DeMaso and Charlie Toole

You couldn’t miss it, but now it’s official—we’re in a recession. The National Bureau of Economic Research, the trusted authority in making these calls, announced last week that the U.S. entered a recession in the first quarter due to pandemic-related economic slumps. Yet the stock market is up nearly 40% from its March 23 low and the NASDAQ has touched record territory.

In this episode of The Adviser You Can Talk To Podcast, Director of Research Jeff DeMaso and Vice President and Portfolio Manager Charlie Toole analyze the history of dislocations between the market and the economy, and why using recessions to “time” the market is usually a losing strategy.

In this engaging discussion, Jeff and Charlie discuss:

  • Stocks’ returns during the past 11 recessions
  • Why the market is not the economy
  • Media hype that bored day traders are juicing stock prices via smartphone
  • The impact of government safety nets on Wall Street’s thinking
  • Risks at home and abroad that threaten recent gains
  • … and much more!

The logic of an economy in dire straits with a surging stock market is tough to square—and Jeff and Charlie have you covered. To hear their analysis, click above to listen now!

Episode Transcript

Charlie Toole:
Hello, this is Charlie Toole and I’m a portfolio manager here at Adviser Investments, and we’re here with another The Adviser You Can Talk To Podcast. Today I’m joined by Director of Research Jeff DeMaso. Hey Jeff.

Jeff DeMaso:
Hey Charlie.

Charlie Toole:
So Jeff, let’s jump right into it. Last week, the National Bureau of Economic Research, the official arbiter of recessions, stated what we all knew, that the U.S. has entered a recession because of the slowdown caused by the coronavirus. But since its low on March 23, the S&P 500 is up nearly 40%, and the NASDAQ has hit an all-time high and crossed the 10,000 level. If we entered a recession, wouldn’t now be the optimal time for investors to sell their stocks?

Jeff DeMaso:
Yeah. It’s kind of counterintuitive, but even if your superpower was the ability to know in real time when an economic recession had started and ended, that wouldn’t necessarily translate into a very effective trading strategy. That’s, again as I said, counterintuitive. So let me try and explain a little bit of the research I did to come to that, and then I think we can probably talk about why is there this disconnect between the economy and the market? I went back and looked at the past 11 recessions, and found that during six of them, the Dow Jones Industrial Average, so the market essentially, actually gained ground rather than losing ground. And that actually jumps to probably 9 of 11 if you include dividends. I was just looking at price returns, and dividends would give it a little bit of a boost.

Jeff DeMaso:
So call it six to eight, more than half of the past recessions the market actually gained ground. Now on average was only a gain of 0.5% from the start of the recession to the end of the recession. So it’s not much, but it isn’t a loss. Now, I think for most people it’s logical that if the economy is shrinking, and unemployment is rising and people are spending less, that the market should go down. But the reality is that the market tends to fall before the recession starts and then it tends to rise before the bottom is put in. This is what people mean when they say that the market looks ahead. So for example, if we go back to 2008–2009, The Great Recession, and this was one of the times where you wanted to avoid the market during the recession. But if you look at the end of the recession, so February 2009 to June 2009, the S&P rose 26%. And over those four or five months, GDP fell at a 1.2% rate. The unemployment rate rose from 8.3% to 9.5%. Industrial production fell.

Jeff DeMaso:
This was a time where the economy was continuing to worsen, but the market had a good rally. So, this isn’t meant to be a comment that the recession is over and we’re all clear. But the fact that today the market is roughly where it was at the end of February, which is when the NBER said that the economy peaked and the recession started, we’re pretty flat. We’re pretty much where we were at the start of the recession. And so that’s kind of about average, it’s kind of par for the course of what we’ve seen. So again, from the start of recession to the end of a recession, while there’s a lot of economic pain in there, and I don’t mean to dismiss it, from a purely market perspective, avoiding the market during recessions hasn’t necessarily been a successful trend.

Charlie Toole:
And that’s very interesting research and point. I think most the average investor probably thinks that a recession has started, I should get out of the market. But like you said, the market is anticipating that and already moving. And even if you tried that as a strategy, you wouldn’t be very successful. But I want to touch on another thing that you mentioned, and we’ve been getting this question a lot, is how can the market continue to go up when the economic reality is so dire? Every Thursday we get initial jobless claims, which are people filing for unemployment. And we’ve seen those numbers consistently be over a million and upwards of two and three million every week. But the market seems to go up on those days, which doesn’t make sense.

Jeff DeMaso:
No, it is a bit of a puzzle. And my opening comments are trying to say that that’s kind of a bit of a normal puzzle. We’ve seen that puzzle happen before. But what’s going on today? One thing I’ve talked to some investors about is the idea that the market doesn’t exactly match the economy. So if you take the FAANGs (Facebook, Apple, Microsoft, Amazon, Google) and we look at what their revenues are, it’s about 5% of overall revenue in the economy. So it’s 5% of GDP, you could call it. But those five companies are about 20% of the market-cap value of the S&P 500. So those companies certainly are a big part of the economy, 5% or nearly so of GDP is nothing to sneeze at, but they’re nearly 20% of the market. There’s this mismatch between the composition of what the stock market looks like and what the economy looks like. And for better or worse, those handful of big tech companies did fairly well through this pandemic as our response was to tell everyone to stay home if they can, to work from home if they can. And that means you’re going to be using more Apple products, more time on Google and ordering more from Amazon. So, they were among the winners column when it came to this pandemic.

Charlie Toole:
And I think one of the big headlines that has been out there a lot more over the last week or two, is the legion of millennials and day-traders that are on Robinhood, essentially day-trading and gambling with the stock market. And we’ve talked about this in a lot of our investment meetings, many of those stocks that are very popular on Robinhood are in some of the industries that were hardest hit in the crash. Industries like airlines, cruise companies, car rental companies. And a lot of the headlines and the stories in the media are talking about these legion of millennial day traders driving the market. But I find it hard to believe that these smaller accounts on Robinhood could be driving this massive trillion plus dollar market.

Jeff DeMaso:
Yeah, I agree. I mean, I think you can probably point to some of their trading on individual stocks. The idea of Hertz going up however many percent it did while in bankruptcy is certainly a bit of a head-scratcher, and maybe you point to newer day-traders trying to figure things out. But I think another point to keep in mind, you talk about, do they have the ability to move markets? Well, debatable. But who do have the ability to move market are more of those professional managers, whether it’s mutual funds or pensions and the like. And the fact is that a lot of cash was raised in March, a lot of money went into money market accounts and came out of equity funds. And we are starting to see those flows reverse and come back to the market.

Jeff DeMaso:
Last week Lipper reported that $30 billion came out of money market funds last week, and $20 billion went into equity, mutual funds and ETFs. Bank of America has a fund manager survey, and they saw cash levels drop from 5.7% to 4.7%. So that’s money going back into equities. Hedge funds reported that their exposure to the market went from 34% invested to 52% invested. So that’s a big jump. We are seeing some of the “smart money,” if you want, although I don’t love those separations, but we are seeing some of that money come back into the market. And I think that’s buying support for the rises we’ve seen in prices recently.

Charlie Toole:
And that makes more sense. I mean, we could debate whether or not it’s smart money, but it’s definitely a lot of money. A lot of money controlled by hedge funds and mutual funds. If they’re moving their cash into the market, that could definitely help spur some of the rises that we’ve seen. But I think it still gets back to some of the economic data that we’ve seen, in that you mentioned that the market is not always the economy. But we’ve seen some recovery in the data, and that’s, I think one of the things that’s driving this market higher, is that it’s not necessarily positive, but it’s getting better. And this is something you talked about in a podcast a week or two ago.

Jeff DeMaso:
Yeah. This is kind of one of my favorite points to come back to is the idea that things are bad, but getting better. And sometimes the market reacts more to the direction of the data than the absolute sense of the data. So the idea that it’s more important for our investors and sentiment whether things are getting better or worse than whether they’re more just good and bad. And objectively things are bad, there’s a lot of economic pain out there. Again, I don’t mean to dismiss that struggles that individuals and small businesses are facing and will continue to face, but the data is getting better. I think it’s, you can’t really refute the fact we’re seeing a V-shaped recovery. Now, you can see that across a number of different parts of the data. I mean, retail sales fell about 9% in March, another 16% in April, a big drop. But they jumped 17% in May.

Jeff DeMaso:
That’s coming off of, it’s a “V” bottom. So, the Purchasing Manager’s Index fell from 49 at the end of March to 41 in April, and then they bounced up to 43 in May. And you can see this in other data. We’re seeing this “V” bottom. There’s a bunch of questions around it. I mean, how high does that bounce go? How high is that V? Maybe we don’t go straight back up to prior levels. There’s a question of how durable it is. People talk about U’s, or V’s, or W’s. The way I’ve kind of been thinking about it is, maybe we took the elevator down in this recession and we’ll be taking the stairs back up. Meaning it’s going to take a little bit longer, we might have to take our breath at a couple landings, but kind of moving up in the right direction. And the Fed and Congress have been doing some of their part. Maybe you can talk a bit about what they’re doing to try and bridge a gap or get us through this.

Charlie Toole:
Yeah, that’s a great point. When we were in the dire straits of late March and the market was dropping precipitously, both the Fed and Congress were very aggressive in trying to stem the tide. The Federal Reserve cut rates to zero and they implemented quite a few programs to make sure that markets were functioning properly, especially fixed income markets. And Congress helped, as you said, extend a bridge or try to bridge us through getting through the lockdowns and essentially the economic shutdown. There were a number of programs put in place. But I think the concern that’s out there right now is that some of these programs are going to be coming to an end. So was that bridge that Congress built long enough to get us across the divide?

Charlie Toole:
And the first of those programs was the Paycheck Protection Program. This was about $350 billion that went into small businesses to allow them to continue to pay their employees. Some of those funds are going to be exhausted over the next few weeks. There was also an additional jobless benefits that Congress approved, and that was an extra $600 per week that goes through the end of July. So there were some people that filed for unemployment that were getting their unemployment plus an additional $600. So that’s, in some cases, as much or more than they were making when they were employed. So those people were able to continue to spend and not have the economic hardship that comes with losing your job and filing for unemployment.

Jeff DeMaso:
Yeah, I agree on that one. I’ve talked to a few friends who’ve been laid off in this, and that extra $600 per week right now is going a long way for them. So that running out is certainly something that we should be keeping an eye on.

Charlie Toole:
Right. And I think that that’s one of the things that at least it’s a known known. It’s something that you can see that’s coming to an end in July. And there’s been a lot of debate in Congress about extending the stimulus, extending that benefit. And that’s one of the things that we’re keeping an eye on. I know there was a $3 trillion HEROES Act that was passed by the House of Representatives. The Senate hasn’t taken up that bill or their own version of that bill, but there is a lot of expectation that more stimulus could be coming to the market. And of course, there was the $1,200 relief payment sent to millions of Americans as part of the CARES Act. Most of those checks have gone out. Again, there’s talk about whether or not another version of that, another check should be sent. But there’s a lot of these programs that were in place.

Charlie Toole:
We haven’t even really touched on some of the issues with rent for smaller business. There were some, basically, rent forgiveness programs that were put in place that allowed people in small businesses to not have to pay rent while they were shut down. And those are going to start to roll off again here over the next several weeks and several months. So I think that the final point that we’ll make here is that we’re not out of the woods yet. There’s still a number of risks out there. We’ve touched upon some of these programs that are expiring and the market is likely to continue to be volatile as we move forward.

Jeff DeMaso:
Yeah, I completely agree. I mean, you talked about known risks out there. Like, clearly the pandemic is not done and exhausted. It is not solved. We’re seeing cases rise in different regions in the U.S. and certainly other parts of the globe. South America seems to be the real epicenter and bearing the brunt of this right now. But we’re seeing outbreaks in Beijing and Berlin and other cities around the world. So we’ll see how those countries handle those outbreaks and what that may point to for the U.S. Earnings is another concern. We’re going to see those declines. There are legitimate worries and risks out there. I think to go back to where I started, the market can handle knowing that there’s going to be some bad news ahead, but can it see a brighter path ahead? And often the market has acted ahead of the bottom in the economy and hasn’t waited for that all-clear sign. So certainly it’s uncomfortable to be investing when there’s so much economic pain, but history tells us that sticking through those periods of spending time in the market can pay off in the long run.

Charlie Toole:
Jeff, I think that’s a great point to end on. So, thank you for joining me today. I appreciate your insights and your thoughts on these topics.

Charlie Toole:
This has been Charlie Toole and Jeff DeMaso from Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. If you’ve enjoyed this conversation, please subscribe and review our show. You can check us out at Your feedback is always welcome. And if you have any questions or topics that you would like us to explore, please email us at Thank you for listening.

Podcast released on June 17, 2020. This podcast is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

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Even if your superpower was the ability to know, in real time, when an economic recession started and ended, that wouldn’t necessarily translate into an effective trading strategy.

Jeff DeMaso, CFA

Director of Research

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