The S&P 500 is mostly concerned with duration (chart)

Building on my post from the other day, ‘Not Depth…Duration’, I want to show you something from this morning’s Bank of America Merrill Lynch Chart Blast – it shows a very correlation between how bad the drawdowns for the S&P 500 are versus the amount of months a recession goes on for. The longer the recession, the worse the stock market’s trough. In other words, the eye-popping “30 PERCENT DECLINE IN GDP” stuff is missing the point. It’s not how bad things get at their worst, it’s for how long it goes on for that the stock market usually reacts to. BofA looked at recessions going back to 1928 to create this chart:

Recession duration vs S&P 500 selloffs Recession duration provided the strongest indication of how sharp S&P 500 selloffs would be with a 0.69 R squared. In discussing the eventual recovery, The BofA economics team notes that ultimately, what level activity returns to depends critically on the response of confidence and demand, and the effectiveness of macro stimulus. Indeed, the longer the shutdown, the deeper the wounds that need to heal before confidence fully returns. Our work shows this view on the impact of duration of contraction is generally true, beyond the scope of the pandemic.

Source:

Sizing up recessions: The extent of contraction and market corrections
Bank of America Merrill Lynch – April 7th, 2020

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Not Depth…Duration (TRB)