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By the end of the first quarter, it seemed as if we had gone through a much-needed correction, and we were on our way to a recovery. That theory ended quickly as the 2nd quarter turned into something much worse as we entered bear market territory for the first time since March of 2020. It is a rather short period of time between bear markets which is unusual, but what happened in between was equally as unusual. The power of the Covid recovery in the stock market was not only steep but the short period of time to get there was also unusual. Clearly, many valuations in individual stocks got to nosebleed levels which always results in a severe and necessary correction. Unfortunately, these actions tend to punish all market participants and the process sometimes takes longer than we would like.
What is a Recession?
Stock market corrections are often synonymous with recessions, but they don’t have to be. And while many media pundits and some analysts would claim that we are “are already in a recession”, there is a technical definition of a recession that has not been reached and likely won’t be reached in the very near future. That definition is simply two consecutive quarters of negative GDP. During the first quarter, the final GDP reading was a negative -1.6%. However, as we enter the 2nd quarter, the Conference Board’s forecast is that GDP will rebound to a positive +1.9%. Keep in mind that the 1.9% positive forecast is for the quarter that just ended and is likely in the “ballpark” as forecasts go, thus thwarting the theory that we “are already in a recession” that many are touting. The Conference Board is forecasting an increase of 0.8% for the third-quarter GDP which we have just entered.
Other Factors at Play
With that said, the Conference Board does see a recession happening. It is forecasted to be short and shallow, but technically a recession. Specifically, the forecast is for a negative -0.3% GDP in the fourth quarter of 2022, followed by a negative -0.4% GDP in the first quarter of 2023 which will then rebound to recovery mode in the 2nd quarter of 2023 and beyond. With that said, there are many forces that could work to turn that forecast around – specifically, there are many supply shortages that need to be resolved and as they resolve, that could spark a much-needed jolt to the economy which could also ease pricing and inflation at the same time. While we wait, we are at the mercy of the economic data and poor sentiment in the market.
13-Year Bull Run
Markets move in mysterious ways. Sometimes they go up in the face of warning signs and it takes an event to break it. As that is happening, valuations become unreasonable and unsustainable. It stands to reason that we may take some time to unwind as the valuations were certainly very lofty.
We recently read an interesting quote from venture capitalist Bill Gurley which read,
“An entire generation of entrepreneurs & tech investors built their entire perspectives on valuation during the second half of a 13-year amazing bull market run. The “unlearning” process could be painful, surprising, & unsettling to many…”¹
We think this just about sums it up. Unfortunately, these types of events take their toll on virtually all asset classes, and just as the market continued its upside in the face of warning signs, it can continue to go down even as green shoots materialize. However, at some point, this too shall pass, and the markets will rebound and likely will do so in spectacular fashion as it corrects back up to normal valuations from an overshoot to the downside.
¹. Gurley, B. [@bgurley] (2022, April 29) An entire generation of entrepreneurs & tech investors built their entire perspectives on valuation during the second half of a 13-year amazing bull market run. The “unlearning” process could be painful, surprising, & unsettling to many. I anticipate denial. Twitter. https://twitter.com/bgurley/status/1520111743942418434?lang=en
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