Should Investors Fear a Double-Dip U.S. Recession? | Lord Abbett
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Economic Insights

It seems unlikely that a temporary setback in U.S. GDP growth will have a significant negative impact on investors. Here’s why.

Read time: 3 minutes

The pandemic-led 2020 U.S. recession looks like it will be the shortest downturn on record, lasting only eight weeks compared to the 48-week average of previous pullbacks, provided, of course, there is no second pullback. Coincident indicators of economic activity dropped in March and April but began to recover in May and have continued rising.

 

Figure 1. Key Indicators Show a U.S. Economy on the Mend

Coincident U.S. economic indicators, September 30, 2019–September 30, 2020

Source: Federal Reserve Bank of Philadelphia, Coincident Economic Activity Index for the United States [USPHCI], retrieved from FRED, Federal Reserve Bank of St. Louis. Data as of November 10, 2020. The Coincident Economic Activity Index includes four indicators: nonfarm payroll employment, the unemployment rate, average hours worked in manufacturing and wages and salaries. The trend for each U.S. state's index is set to match the trend for gross state product.

 

The question now is whether another wave of COVID-19 infections provokes a strong enough negative reaction among households and businesses to send the economy back into a tailspin before an enduring recovery takes hold.

Double Recession Trouble?

“Double-dip” recessions are not at all unusual. In fact, seven of the 11 post-WWII recessions before 2020 had a positive quarter sandwiched between two negative ones before ultimately hitting bottom. Those that didn’t go through a double-dip—the four “continuous” downturns—tended to be relatively benign for equity investors, with stock prices finishing higher at the end of the downturn than they were at the beginning in three out of four cases. Moreover, stocks hit bottom relatively early in those downturns; the deepest peak-to-trough decline was only 15%.

 

Figure 2. “Continuous” U.S. Recessions Have Left Equities Relatively Unscathed
S&P 500 Index performance during indicated time periods

Source: Bloomberg, National Bureau of Economic Research, and Lord Abbett. Historical data as of November 11, 2020. Horizontal axis=weeks in recession.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

 

The seven double-dip downturns displayed a more complicated pattern of adjustment in stock prices. The bottom was deeper, averaging 22% from the peak in the economy to the lowest weekly close in the market, and it tended to come later—roughly two-thirds of the way through the downturn as opposed to the first third in the continuous cases.

 

Figure 3. Tracking Equities’ Performance in “Double Dip” U.S. Recessions

S&P 500 Index performance during indicated time periods

Source: Bloomberg, National Bureau of Economic Research, and Lord Abbett. Historical data as of November 11, 2020. Horizontal axis=weeks in recession.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

 

The decline in stock prices was particularly sharp and the bottom relatively delayed in three of the double-dip recessions: 1974-1975, 1981-1982, and 2008-2009. In the first case, a very sharp rise in oil prices during the downturn acted as an effective tax increase and sent consumer spending into a prolonged tailspin. In the second, the U.S. Federal Reserve (Fed) kept the fed funds rate above 10% until three months before the downturn ended as part of its campaign to decisively quash double-digit inflation. In the third case, the failure of Lehman Brothers in September 2008 was an unanticipated shock and it provoked a global liquidity crisis that plunged the U.S. economy into a severe downturn over the next three quarters, aggravating the very mild decline that had taken hold in over the first three quarters of the year.

The other four double-dip recessions had more in common with the continuous ones than the three cases reviewed above: the economic downturns were much shorter, the decline in stock prices from the economic peak to the lowest weekly close averaged only 10%, and the low point came earlier as investors’ expectations of recovery were not dashed by a second leg down.

 

Figure 4. Stock Prices During Post-WW II U.S. Recessions
Equity performance represented by the S&P 500 Index

Source: Bloomberg and Lord Abbett. Historical data as of November 11, 2020. Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

 

Not Necessarily Negative

Will investors’ recovery hopes founder this time? With positive news regarding a vaccine and therapeutic treatments for the virus already in hand, we believe the positive trend will build as more and more researchers report on their efforts. Additionally, with stimulative U.S. monetary policy in place, and the potential for renewed fiscal stimulus by the end of the first quarter of 2021 at the latest, we think there are plenty of reasons for a “light at the end of the tunnel” to remain in sight – even as news or worsening infection rates continues to proliferate. Thus, even if U.S. gross domestic product (GDP) registers another negative quarter after the robust recovery in the 2020 third quarter, we believe it may well do so without stocks taking another sharp leg downwards, as has been the case in the majority of the previous double-dip recessions.

The bottom in stocks registered very soon after the recession began in March 2020 as monetary and fiscal policy gave investors reasons to hope for a rapid turnaround, even as uncertainty about the severity and extent of COVID-19 infections was at a peak.

 

Figure 5. U.S. Stocks Staged a Rapid Recovery from March 2020 Lows

S&P 500 Index prices, August 2, 2019–November 10, 202

Source: Bloomberg and Lord Abbett. Data as of November 11, 2020. Shaded area represents recession.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

 

Now, with much more known about how to treat the illness and more relief on the way on both the medical and economic policy fronts, we believe it seems unlikely that a temporary setback in GDP growth will exert severe penalties on investors.

 

The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy.                                                      

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect the deduction or expenses, and are not available for direct investment.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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