Markets Don’t Wait For Official Announcements

Some investors may worry about the stock market sinking after a recession is officially announced. But history shows that markets incorporate expectations ahead of economic reports.

• The global financial crisis offers a lesson in the forward-looking nature of the stock market. The US recession spanned from December 2007 to May 2009, as indicated by the shaded area in the chart.

• But the official “in recession” announcement came in December 2008 – a year after the recession had started. By then, stock prices had already dropped more than 40%, reflecting expectations of how the slowing economy would affect company profits.

• Although the recession ended in May 2009, the “end of recession” announcement came 16 months later (September 2010). US stocks had started rebounding before the recession was over and climbed through the official announcement.

The market is constantly processing new information, pricing in expectations for companies and the economy. Investors who look beyond after-the-fact headlines and stick to a plan may be better positioned for long-term success.

Don’t fret about the possibility of a recession and it’s impact on the stock market. The market is making moves right now that are forward-looking, and will be moving on well before any “official” recession announcements are made by the National Bureau of Economic Research.

Source: Dimensional Fund Advisors