Even after the U.S. economy posted its second consecutive quarter of negative growth which technically equates into a recession, the markets are likely to continue moving higher in the short term with the understanding that investors have already priced in the bad news.
Markets tend to rally once uncertainty is lifted.
The GDP numbers showed that the U.S. economy contracted at an annual rate of 0.9% in the second quarter.
Despite strong job growth and solid consumer spending, experts are not convinced that the economy is in a real recession.
According to historical data, markets tend to move higher in the weeks immediately following a second consecutive reading of negative GDP growth, because most investors think the worst is over for stocks before the rest of the economy.
The S&P 500 gained an average of 1.3% over the next week, rising over 80% of the time, according to CFRA Research.
CFRA data shows that stocks rose an average of 0.8% two weeks out and rose an average of 60% over the next month.
"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."
Stovall says that two successive quarters of GDP decline are not necessarily death knells for the market. Once the news is out, investors are more likely to buy back shares, he says.
The Federal Reserve has made rate hike decisions this year. According to recent data from Bespoke Investment Group, on all four occasions when the central bank announced increases in 2022, stocks surged higher.
The jury is still out on whether the U.S. economy can avoid a downturn later this year and in the years to come. The National Bureau of Economic Research says there have been 13 recessions in the post-World War II era. Since 1945, the S&P 500 has posted positive returns in half of the 13 years with a recession.
What happens to the market during an economic downturn? You may be surprised by the news.
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