You may think that recessions and bear markets go hand-in-hand. But they don't. In fact, "normal" recessions don't lead to bear markets.
In the early 1980s, a U.S. economic recession led to just a 15% drawdown in stocks. The early 1990s recession similarly led to just an 18% drawdown in stocks.
Sure, the early 2000s recessions resulted in a 40% stock market collapse, while the 2008 recession sunk stocks by 50%.
But this is not that.
In 2000, we suffered from gross overvaluation. The S&P 500 was trading at 26X forward earnings, with a 10-Year Treasury yield above 5%. Today, the market is trading at 19X forward earnings, with a 10-Year Treasury yield below 2%. Today's market valuation is significantly lower both in absolute and relative terms compared to what we saw in 2000.
Meanwhile, in 2008, the entire U.S. financial system was on the verge of collapse. We don't have that today. Balance sheets across banks, corporations, and households are cash-heavy and very strong. Interest rates are very low. We do not have another 2008 on the horizon.
So, in the grand scheme of things, if we do head into a recession in 2022/23, it will likely be a run-of-the-mill recession -- like the early 1980s and early 1990s -- in which stocks dropped less than 20%.
Adapted from:
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