The US National Bureau of Economic Research (NBER) defines a recession as the period between the peak of economic activity and the lows of economic activity immediately thereafter.
Accordingly, NBER was right to call the peak of the latest economic cycle in February 2020, but the bottom could fall in late April if considering unemployment benefits and early May 2020. if reviewing employment or personal income data.
For the market, determining the time of the economy is expanding or recession is very important.
Economic growth as measured by the Institute of Supply Management’s (ISM) manufacturing index typically peaks 10 to 11 months after the recession ends, according to research from Deutsche Bank.
Hence, if NBER’s definition of degradation is followed, the present time period is the peak of the production index.
Correlation between the ISM Manufacturing Index and the S&P 500 Index (Source: ISM, Haver, Deutsche Bank asset Allocation)
Over the past 20 years, there is a 73% correlation between the annual and continuous increases in the S&P 500 index and the level of the ISM manufacturing index. It means that growth assets, like stocks, are correlated with measures of economic growth.
According to Deutsche Bank data, the S&P 500 sold off around the peak of growth with an average of 8.4% and if the ISM manufacturing index was flat, the S&P 500 index usually fell 5.9% on average. And the duration of corrections from this peak is usually two weeks after the economic data peaks and the downtrend usually lasts about 6 weeks.
According to Deutsche Bank, the US economy will peak in the next three months when the manufacturing index in March has just reached 64.8%, the highest level in 38 years.
“When growth peaks in the next three months, we expect fund managers to reduce their stock exposure and that individual investors will hardly dare to bottom out. According to historical experience, the market can decrease by about 6% if economic growth goes sideways near the peak, or decrease more than 8.4% if the V-shaped economic growth is reversed ”, group of strategists Deutsche Bank said.
However, the stock market may bounce back later. And the key thing in the late summer and fall will be whether inflation sustains or accelerates and how the Fed will react to further shape market trends.
