The stock market expects a recession

After the trillions of dollars expended by governments to mitigate the economic fallout from the COVID-19 pandemic, the artificial and extreme cuts in key interest rates by central banks, the invasion of Ukraine by Russia’s Vladimir Putin, the economic ills add up.

Rising gas prices, real estate speculation, high inflation, supply problems, household over-indebtedness, rising interest rates… are hurting the economy to such an extent that it could lead us into a recession.

If the American stock market has performed so poorly over the past few months, the United States will soon slip into a recession or major economic slowdown precisely because of this investor fear. Klammer: We must never forget that investors and analysts in the stock market try to anticipate “reality” several months in advance.

Along with fears of a plunge into recession, the “solid” rumor that the US Federal Reserve will target inflation by raising interest rates by 75 basis points tomorrow is shaking investor confidence. And that more hikes will follow through the end of the year to fight inflation.

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Wall Street in a bear market

Therefore, after the NASDAQ, it is now the turn of the most important stock market index in the world, the S&P 500 of the New York Stock Exchange bear marketso in a bear market.

At the end of yesterday’s trading session, the S&P 500 was down around 22% from its all-time high from earlier in the year.

If the value of an index falls by 20% or more during the period from the top to the bottom of the market, it technically falls into a bear market.

This also applies to the NASDAQ index, in which we find, among other things, the giants of high technology. The NASDAQ ended yesterday’s session showing a sharp 33% drop from its recent high.

On the American side, there’s also the Russell 2000 small-cap index, which has fallen sharply since its recent peak. It shows losses of 30.5%.

Of the 30 major American industrial companies, only the Dow Jones has managed to avoid the painful transition to a bear market. Note that it’s not far behind with its 17.5% decline so far.

Canadian solution

While the American markets have been under pressure these days, the Canadian stock market, particularly its main index, the S&P/TSX, has recorded relatively smaller losses, namely 11.8%.

It is the good performance of securities from the “Energy” and “Materials” sectors that has allowed the Toronto Stock Exchange Barometer to outperform the American market.

But as far as the Canadian small-cap index S&P/TSX Venture (Toronto Venture Exchange) is concerned, disaster is looming. The index is down 34% from its 52-week peak.

The Quebec IQ-30 and IQ-120 indices show losses of between 13 and 17%.

Note that the Bank of Canada’s sharp rise in interest rates, including another 75 basis point hike next July, could stun many households and businesses.

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What is a recession?

When is a country in recession? In this case, we see a decline in gross domestic product (GDP) for at least two consecutive quarters.

The last recession in the United States dates back to February 2020 when the COVID-19 pandemic hit.

Luckily it only took two months compared to three months in Quebec.

Fingers crossed that the next recession will be just as short!

Well deserved correction

In the last three years, investors have exceeded reasonable bounds. Speculation has caused many stocks to explode. Earning money on the stock market had become too easy.

While the Canadian stock market made us richer at an annualized rate of 17.5%, the American stock market reported an annualized return of between 20% and 33% over three years.

Today we are “victims” of the return of the pendulum.

Reality catches up with us. And our wallets are plucked.

In the stock market, it should be remembered that for a pessimistic seller who is liquidating securities, there is an optimistic buyer who thinks he is buying at a bargain price.

The stock market is full of bargains right now. But buying in a bear market requires nerve and most importantly…deep pockets!

The declines between the recent stock market high and yesterday

  • Dow Jones: -17.5%
  • S&P 500: -22.2%
  • NASDAQ: -33.2%
  • Russell 2000: – 30.5%
  • Toronto S&P/TSX: -11.8%
  • S&P/TSX venture: -34.7%
  • IQ-30 Quebec: -13.0%
  • IQ 120 Quebec: -17.0%

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