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If we are heading into a recession, what might that mean for the stock market?


You have probably heard how the probability of a global recession is as high as 98%, and your initial expectation is likely that a recession would lead to further declines in the market. However, history shows us that may not be the case, and the probability of recession being this high could actually be a signal to buy (or stay invested), rather than to sell.

The following chart comes from a BNN article, and shows how the global stock index has performed as the probability of recession has gone up and down over the past 35 years. Some very interesting and surprising observations can be made after studying it.

Here is what has happened in the past when the probability of a recession has been around the level it currently is at:

1.      In the past 35 years, there have been 10 other instances where the probability of a recession was at or above 90%, like it currently is

2.      Of those 10 times, only once (2001) did the market go through a prolonged and significant decline after the probability of a recession peaked

3.      Most of the time, the market had already declined prior to recession probability peaking, and the market was generally higher six months to a year after recession probability peaked

4.      On two occasions (2002 and 2008), recession probability peaking at or above 90% almost perfectly timed the bottom of a market downturn

5.      Almost every time the probability of a recession rose above 90%, the global economy was either already in a recession (the shaded areas), or near the end of it of one

6.      As well, keep the following in mind when you hear that we may be going into a recession:

   - Economic data tells us how the economy was doing a month or two ago, not how it is currently doing or how it might be doing in the coming months

7.      Recessions are generally declared after they have already started, due to the lag in economic data

8.      The stock market is “forward looking”, meaning it reacts today based on what is expected to happen 6-12 months in the future

If you wait to invest until the economic outlook is much better and recession odds are lower, then markets will already be reflecting this, and you will likely have missed out on a good opportunity to ‘buy low’

We do not know with certainty what direction the markets will go over the next few weeks and months. However, the past tells us that when recession odds are this high, we are likely already in a recession and that to some extent it is already priced into the markets. As well, there is likely more potential upside compared to downside over the next 6-12 months from current levels in the markets.

Dennis Rubeniuk, Investment Advisor

Dennis Rubeniuk is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Dennis Rubeniuk who is an Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.


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