Despite the threat of a recession, the S&P 500 has experienced a significant increase, climbing approximately 17% this year to reach around 4500, as of Thursday. This bullish trend seems to be at odds with the economic activity as measured by the ISM Composite Purchasing Managers Index (PMI), which saw a minor decrease in the first half of this year compared to the same period in the previous year. However, a recent slight uptick in the PMI suggests growth.
Historically, there has been a correlation between market performance and PMI data. If this were currently the case, the S&P 500 would be around 4000, approximately 12% lower than its current level. However, past trends have shown that alignment between these two indicators isn't always necessary.
For instance, from late 2015 through much of 2016, the S&P 500 increased by about 5%, even though the PMI had started off lower than it was a year earlier. This trend continued from mid-2016 to early 2020 before the pandemic hit. During this period, the S&P 500 surged by over 60%, while the PMI mostly remained above 50, indicating a phase of expansion.
In the first half of 2017, despite a downward trajectory in PMI, the S&P 500 continued to rise and escalated by 39% leading up to pre-Covid high. These instances indicate that markets can overlook short-term economic weaknesses as long as overall growth continues.
The Federal Reserve's efforts to curtail economic demand and inflation through higher interest rates are beginning to temper economic activity. Nevertheless, a recession induced by these policies has yet to materialize. Analysts predict that even if a mild recession were to occur, the Fed would likely halt rate hikes as inflation rates decrease, allowing economic growth to stabilize.
Analysts are also optimistic about the future, predicting growth in demand for housing-related industries and consumer electronics next year, following a slump in 2023. The travel and leisure industries are also expected to see a revival in demand. This optimism partly explains the sustained market gains and suggests they may persist.
Economic growth, albeit modest - mostly in the low single digits in percentage terms - continued from 2016 through 2020. It was only the global lockdowns that ultimately led to a recession. This pattern appears to be repeating today, with the market anticipating continued economic growth despite potential hurdles.
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