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  • Writer's picturePatrick Ling

Are We Headed For A Recession?

The biggest question on everyone's mind now is whether we are headed for a recession. There is no shortage of opinions from influential voices, so I will not offer any opinion. What I will do is look at the recent price action of the S&P 500, and look back at previous periods with similar price action and what happened subsequently. The price action I'm referring to is a greater than 20% drop from the peak, followed by a rebound greater than 15% from the low, which then led to a subsequent lower low. This is illustrated in the price chart below.

S&P 500 chart 2022-2023
The recent price action of the S&P 500

I looked back as far as the beginning of the S&P 500 in 1928. Outside of the Great Depression, there were 12 episodes of the S&P 500 dropping more than 20% followed by a rebound greater than 15% from the low. Only 3 episodes led to a subsequent lower low. The rest resulted in the start of a new bull market. An example is shown below.

S&P 500 chart COVID-19
A new bull market was born after the COVID-19 panic

Let's now take a closer look at the two instances where the S&P 500 made a lower low since that is what happened recently. The two periods are the Tech Bubble in 2000 and the Great Financial Crisis in 2008. Their charts are shown below.

S&P 500 chart Tech Bubble
The S&P 500 dropped even more after the lower low was made
S&P 500 chart Great Financial Crisis
Similar price action as Tech Bubble, except the new bull market started quickly

These two periods are the most similar to what we are experiencing today, but this is where the similarities end. In both instances, the National Bureau of Economic Research (NBER) declared a recession shortly after the lower low in the S&P 500. Today, it doesn't look like the NBER will call a recession anytime soon. To know why, let's look at the historical unemployment rate.

Historical Unemployment Rate
A rising unemployment rate is always a feature of past recessions

The NBER always declares a recession after the unemployment rate has been rising for a while. The latest unemployment rate shows that workers are still gainfully employed today. Perhaps the unemployment rate might increase soon, but for now, a recession is nowhere in sight. Once again, we find ourselves in uncharted territory.


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