If recent market volatility is portending recession, equity markets are mispriced: Berman

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The recent market volatility may be the early days of pricing in a less-than-perfect economic landing.

Larry BermanTraders work on the floor of the New York Stock Exchange in New York, US, on Friday, Feb. 16, 2024. The FOMC recognized that the labour market is softening. Our chart this week plots the S&P 500 and the 12-month trailing earnings since 1970.

Historically, earnings always fall in the wake of a recession. There are no exceptions and it’s just the degree and magnitude that needs to be debated. While we cannot time these periods in the business cycle with much precision, we need to understand what may or may not be ahead of us. Many, including us, were expecting a recession in the wake of the FOMC’s most aggressive tightening cycle in 2023, and it never materialized. We did see earnings flatten out after the post-Covid rally in 2021 and all the recent gains for markets have come on multiple expansion.Looking forward, the bottom up consensus earnings for the next few years is looking for growth of 10 per cent, 13 per cent, and eight per cent for the next three years.

During the recession, the S&P 500 fell 33.92 per cent from its highest point during the recession. The NASDAQ fell 30.25 per cent from its recession peak. It took the S&P 500 126 trading days after the end of the recession to recover to its pre-recession level. It took the NASDAQ 76 days. The stock market then went on a record-breaking run until early 2022.The S&P 500 fell 37.56 per cent over the course of the Great Recession and the NASDAQ fell 30.95 per cent.

The 18 months prior to the dot-com crash saw the NASDAQ triple as investors dumped money into companies that had even the loosest connection to the internet. It took the S&P 500 920 trading days after the end of the recession to recover to its pre-recession level. The NASDAQ took 540 trading days to recover to its pre-recession level, but the NASDAQ didn’t fully recover from the dot-com crash until 2015.The early 1990s recession , didn’t have an overall negative impact on stocks.

 

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