Historically, stock markets have performed better under Democratic presidents. Causation or correlation?
Many people right now are wondering why the stock market is at all time highs while the economy is in recession. I too wondered if this were an anomaly created by excessive Fed printing. So I looked to see if something similar has happened before.
As it turns out, during the 1981-1982 recession, the stock market (blue line in chart below) hit an all-time high after recovering from significant losses.
During the 1981-1982 recession, the return to stock market all time highs occurred close to the end of the recession as unemployment (maroon line) peaked.
Of course, the end of the 1981-1982 recession was only known later in hindsight, so people likely asked the same questions they are today. What they could not see was that the market approached all-time highs because the recession was close to ending. While the transition to growth was slow and painful – as I expect it to be today – with unemployment taking years to return to normal, the markets rallied once economic growth resumed.
The return to growth (second chart below) in 1982 is easily identified by unemployment (maroon line) beginning to fall and Industrial Production (blue line) starting to rise (second chart below). This occurs right near the end of the recession, as indicated by the grey shading.
Industrial Production is a great indication of economic recovery. As you can see (if you have good eyesight) in the chart below is that at the end of every recession (grey shading) Industrial Production immediately grew. The second chart below zooms into the current recession. It is clear that Industrial Production has started to grow once again while unemployment has started to trend down. This indicates the current recession likely ended in April or May and growth has resumed, explaining the stock market’s return to all time highs. (Note the entire period is shaded until the recession’s end is officially retroactively declared months later.) Again, this growth doesn’t feel like growth because we’re rebuilding from an uncomfortable bottom, but the market only cares that things are growing.
The 2020 recession was sharp, deep and short. Markets reacted accordingly and crashed faster and deeper than ever before. The recovery will be long and painful, but we are back on the growth path. Markets sniffed this out months ago explaining the rally. Markets hit all-time highs in 1982 – when unemployment was near its peak. The same thing is happening today.
2019 started off questionably. Markets were just recovering off a Dec 2018 bottom. Little did anyone expect what was to come for the rest of 2019.
As it turns out, 2019 was a stunning year for risky assets. What will 2020 bring?