How will the stock market react when a US recession gets officially declared?

Stock markets do not wait for an official declaration of recession.

Stock market, recession, gdp, growth, inflation, economy
Theoretically, an increase in interest rates and a decline in GDP rates is negative news for the markets.

The stock market is not the economy but still, to some extent, future economic conditions dictate the valuation of stocks. US fed rate hikes are not just impacting the US economy but also the global economic scenario. An official declaration of recession in the US looks highly likely in 2023. A recession means slowing down the economy and in a way hurting the corporate balance sheet from various fronts. No wonder, the stock market is down and flirting with a bear market territory after falling more than 20% from the recent highs. US Fed has raised interest rates by 475 points in 2022. From a near-zero rate regime to rates around 4.75% or even higher is more than enough to push the economy on the way down.

Real gross domestic product (GDP) increased at an annual rate of 2.9 percent in the third quarter of 2022, in contrast to a decrease of 0.6 percent in the second quarter and after a 1.6% drop in the first three months of the year. The National Bureau of Economic Research (NBER) is the official authority tracking the US recession and is responsible to announce it officially. The US stock market is down even before there is an official announcement by the US government on the recession.

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Most analysts expect the official announcement of a US recession to come in 2023. It remains to be seen how the stock market will react then. “Stock markets do not wait for official declarations. Theoretically, an increase in interest rates and a decline in GDP rates is negative news for the markets. However, markets factor in these possibilities and we have also seen markets behaving conversely when official declarations are made. Thus, if the NBER declares that the US is in recession, that in itself may not count for much in terms of how the markets react,” says Ram Kalyan Medury, Founder and CEO of Jama Wealth, an investment advisory firm.

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Therefore, if NBER officially declares a recession, how the markets will respond in 2023 remains to be seen. “ The accompanying commentary in terms of how the NBER sees this pan through would be important. If the FED rate hikes are more than the 1.25% that is factored in, or the NBER projects a grimmer picture of recovery, then markets can tumble quite steeply. However, if Fed rate hikes are lower than expected, or the NBER paints a positive picture of the days to come, stock indices may not shoot off, but will recoup some of the losses made earlier,” feels Medury.

Fed Chief Powell had recently indicated that although the pace of rate hikes will slow down, the terminal rate could be much higher than expected earlier. The Federal Funds Rate is expected to be between 5.1% and 5.25% by the time inflation will appear to be tamed.

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First published on: 23-12-2022 at 18:15 IST
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