Markets Don’t Wait for Announcements
December 5, 2022So let’s get to the punchline first: Markets don’t wait for announcements and smart investors should not focus on headlines. Historical data shows that the markets are efficient and already price in forward-looking expectations for companies and the overall economy.
The data supports that conclusion. In the chart below, the shaded area highlights the U.S. recession of December 2007 to May 2009, as defined by the National Bureau of Economic Research. However, the official recession announcement happened a year after the recession started. By then, US stock prices had fallen more than 40%.* The market had already priced in the expectations that a slowed economic situation would erode company profits. On the flipside, the “end of recession” announcement came 16 months after the actual recession. The chart below shows that US stocks had begun trending upward before the recession was over and continued through the official announcement.
A recession is defined as two consecutive quarters of economic decline, traditionally measured by negative gross domestic product (GDP). But there are other indicators as well, such as a decline in employment, a decline in real income, a decline in production, etc. In many respects, whether the headlines declare an official recession or not, the pain points can still feel very real.
But when it comes to your long-term investment strategy, economic cycles are already accounted for, expected, and built into the plan. Even with the speed and 24/7 nature of today’s news environment, the real headline is that there may not be a headline and that the news is often playing catch-up to what the markets have already known.
1 Start and end dates of US recessions, along with announcement dates, are from the National Bureau of Economic Research (NBER).
nber.org/research/data/us-business-cycle-expansions-and-contractions and
nber.org/research/business-cycle-dating/business-cycle-dating-committee-announcements
* Decline based on the S&P 500 Index’s price difference between the actual start of the recession in December 2007 and the official
“in recession” announcement 12 months later.
Source: Dimensional Fund Advisors. Past performance is no guarantee of future results. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. In US dollars. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
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