Markets Don't Wait For Official Announcements

Dimensional Fund Advisors

Some investors may worry about the stock market sinking after a recession is officially announced. But history shows that markets incorporate expectations ahead of economic reports.

The global financial crisis offers a lesson in the forward-looking nature of the stock market¹. The US recession spanned from December 2007 to May 2009, as indicated by the shaded area in the chart below. But the official “in recession” announcement came in December 2008—a year after the recession had started. By then, stock prices had already dropped more than 40%², reflecting expectations of how the slowing economy would affect company profits. Although the recession ended in May 2009, the “end of recession” announcement came 16 months later (September 2010). US stocks had started rebounding before the recession was over and climbed through the official announcement.

                                                                        Source: Dimensional Fund Advisors

The market is constantly processing new information, pricing in expectations for companies and the economy. Investors who look beyond after-the-fact headlines and stick to a plan may be better positioned for long-term success.

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.
2.  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.

_{The S&P 500 is the Standard & Poor’s index calculated on a total return basis. Widely regarded as a benchmark gauge of the U.S. equities market, this index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The S&P 500 focuses on the large-cap segment of the market, with over 80% coverage of U.S. equities.}

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