Is S&P 500 Already Pricing in Recession?

Is S&P 500 Already Pricing in Recession?

Wharton Professor Jeremy Siegel recently stated that the current stock market already priced in a recession.

The S&P 500 was at 3749 when Professor Siegel made the statement. And now the S&PP 500 fell to 3674.84 last Friday. Which is an astounding 7.52% lower month to date. It seems evident to many investors that we are indeed entering a bear market. And as a result, investors are expecting a recession or at least a mild recession according to Professor Siegel. The signals of recession became revealed in multiple aspects. 

The Federal Reserve just announced a 75-basis point raise in its benchmark interest rates, which is the most aggressive hike since 1994. According to the “dot plot” of individual members’ expectations, the Fed’s benchmark rate will end the year at 3.4%, an upward revision of 1.5 percentage points from the March estimate. Fed Chairman Jerome Powell has expressed that he would not expect such a move to be common. The increase of interest rate aimed to offset the rapid growth of inflation.

The annual inflation rate for the United States stood at 8.6% for the 12 months ended May 2022. The largest annual increase since December 1981 and after rising 8.3% previously, according to U.S. Labor Department data published June 10. Referring to the business cycle table, which contains stages of Recovery, Expansion, Slowdown, and Contraction, the current economy likely belongs to the Slowdown phase. Usually, inflation accelerates during Slowdown, and unemployment continues to fall but at a decreasing rate. The current market matches with the character of a Slowdown phase, and Contraction usually comes after. As a result, a recession seems inevitable for the current market. 

However, this does not suggest that the economy is going to continuously deteriorate.

The Federal Reserve still painted an optimistic picture for the future of the economy. “Overall economic activity appears to have picked up after edging down in the first quarter,” the statement said.  “Job gains have been robust in recent months, and the unemployment rate has remained low.  Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.” This suggests that the current high inflation is closely related to the oil price issue and the pandemic. Therefore, the Russian and Ukraine War condition could largely influence the oil supply. And if the war ended or the ban on Russian oil became relieved. Consequently, would lead to a decrease in energy prices.

Moreover, the lockdowns in China recently have also negatively affected the global supply chain. And if the zero-covid policy could be altered in the future, the high inflation will likely end. 

For the current market, Professor Siegel noted that the S&P 500 is now trading at roughly 17 times forward earnings.

Furthermore, if you exclude tech stocks, the figure is even more impressive at just 13 times earnings. It is usually not that low. Also, though different countries increased interest rates, the rates stand at low historic levels compared to the past. According to Professor Siegel, low interest rate normally brings higher valuation, but it does not accord with the current market. As a result, though the current economy is not deteriorating significantly, investors all seem to predict a recession. Based on the markets’ signals. And the current stock market might already price in recession.

Written by Bingjun Kang

Is S&P 500 Already Pricing in Recession?

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Sources:

Wharton Professor Jeremy Siegel says the S&P 500 is already pricing in a recession | Fortune