What the stock market of 1945 says about the resilient performance of 2023

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It’s a simple question: Why does the U.S. stock market seem to be ignoring a looming recession, one that at least one model says is a 99.3% probability?

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said this year’s 9% gain for the S&P 500 and even stronger 21% advance for the Nasdaq Composite was not unprecedented — the market of 1945 behaved much the same way.

“Coming out of World War 2, the U.S. economy experienced a recession from February through October of 1945, but the S&P 500 continued to march higher. This data point has been a revelation for a number of the investors we’ve sat across the table from over the past month, with several acknowledging that ‘the COVID economy was basically a wartime economy.’ With the realization that the stock market was able to look through the messy transition back to a normal economy in 1945, it becomes far less controversial to think that something similar could happen in 2023,” she says in a note to clients.

In 1945, real GDP began to fall as government spending fell. Inflation, though below wartime highs, was still very hot. The unemployment rate began to rise from very low levels.

“This trip down the rabbit hole was fascinating to us, but didn’t change our minds about how looking at this period provides useful insight for how to think about the present day. Rather, it confirmed in our minds that there are enough similarities to make it a worthy comparison,” she said.

Of course, there are differences too — in 1945, personal consumption and private investment were growing.

But she made another point — the market didn’t hold up in 1946, when it lost nearly 12%. “Even though the recession was technically over by 1946 and the labor market was on the mend, stocks weren’t able to look past the return of onerous inflation in 1946 (when CPI moved up from 2.3% to 8.3%) and a second consecutive year of real GDP contraction. There was ultimately a limit to the stock market’s resiliency,” Calvasina said.

That, she noted, raises the risks for 2024, if earnings and the economy don’t recover, or if inflation lingers. “If those premises fail to hold up, the stock market is likely vulnerable to downside declines either late this year or in 2024,” she wrote.

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