Consumption makes up roughly 68% of the US economy, so any discussion of a soft landing cannot ignore the health of the consumer. Despite evident signs of a slowdown relative to the post-pandemic “revenge spending” period, the outlook for consumer spending remains strong given the excellent financial shape of US households.
While we spend a considerable amount of time reading the macroeconomic data tea leaves in the hope that they will tell us where the stock market is headed next, we shouldn’t forget that the stock market itself is a good predictor of the future direction of the economy. Afterall, with millions of investors watching the same data points, and using them to make investment decisions every day, it is difficult for the market to be completely blindsided by a recession, barring a sudden and unforeseen economic shock (i.e. the so-called Black Swan event). As investors, it is our duty to question the consensus. At the same time, however, we shouldn’t completely disregard the wisdom of the crowd.
In this context, the recent strong performance of the S&P 500 index is quite telling regarding the market-implied odds of the economy falling into recession in short order. Having gained more than 10% over the past 6 months and more than 35% over the past 12 months, the S&P 500 index ended the month of September at a new all-time high (and made additional new all-time highs since then). As the table below shows, these 3 conditions imply a much lower than average probability of recession over the next 3, 6, and 12 months.
Strong S&P 500 Index Performance Implies Low Recession Odds
Source: CW Advisors, Bloomberg, based on monthly data from 1/1/1950 to 9/30/2024
The chart below provides a different perspective on the same data. For the last 11 recessions going back to 1950, the chart plots the path of the S&P 500 index starting 12 months before and ending 12 months after the recession start date, and then overlays the path of the S&P 500 index over the last 12 months for comparison. While every episode is somewhat different, the market on average tends to peak about 6 months prior to the beginning of a recession, and trend sideways to down going into it. Should a recession begin this month, this would be the strongest point ever from which the S&P 500 has entered a downturn.
Recent Path of S&P 500 Index Looks Far From Recessionary
Source: CW Advisors, Bloomberg, as of 10/17/2024
Bottom line: Barring a sudden and unexpected event that causes the economy to plunge into recession, we think the market has correctly sniffed out the soft landing. While that means that some of the gains are now behind us, we expect further gains ahead as the soft landing goes from likely to certain.
Sauro Locatelli CFA, FRM®, SCR®
Director of Quantitative Research
CW Advisors, LLC (“CWA”) (f/k/a Congress Wealth Management LLC) is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). Registration does not imply a certain level of skill or training. For additional information, please visit our website at cwadvisorsgroup.com or visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with CWA’s CRD #310873.
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