What Comes First, A Recession Or An Equity Market Crash?

While analyzing the movements of copper futures, I find a close bonding between the price movements of the commodity, which represents economic growth or weakness, and the directional move of equity markets. COVID-19 has taught our generation a new lesson.

Undoubtedly, history guides us to tackle a difficult situation. But the coronavirus has only written the initial chapters on the spread of infection in different waves, lockdowns and slowing economic activities as well as vaccination attempts to control the impact of the pandemic.

Dr. Copper tells a lot about the prevalence of conditions that could escalate economic growth or a recession. Now, the question is which comes first?

Generally, the impact of recessionary conditions are felt after an equity market crash for a longer duration. But, I find that the recession does not appear all of a sudden, like a market crash. It comes significantly before it leads to a market crash, and remains almost up to three consecutive years after the equity crash comes to an end.

According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions), the recession began in December 2007 and ended in June 2009, and thus extended over eighteen months. The 2008 stock market crash took place on Sept. 29, 2008, when the Dow Jones Industrial Average fell 777.68 points. Undoubtedly this was the biggest single-day loss in Dow Jones history up to this point.

However, most recessions are caused by a complex combination of factors, including high-interest rates, low consumer confidence, and stagnant wages or reduced real income in the labor market. Other examples of recession causes include bank runs and asset bubbles. This time, the sudden spurt in the housing bubble could be a reason for the current recession amid denting impact of the pandemic since February 2020.

The old rule of thumb is that a recession involves six months - or two successive quarters - where economic output shrinks, isn't used anymore. If we go by that criterion, there would not have even been a recession this time. Presently, the current recession has already expanded its roots in global equities since February 2020. Confirmation of the coronavirus that turned into a pandemic caused the global supply chain to grind to a halt which lessened economic growth for a long time during 2020. Undoubtedly, this COVID-led slowdown could last up to a decade this time.

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I find that the U.S. equity markets may witness this sudden nose dive move during this year, even before Sept. 29, 2021, due to economic scares caused by COVID-19. Undoubtedly, the Federal Reserve has escalated this uncertainty for global equity markets due to it categorising inflation as a mere transitory phenomenon.

I find that economic stimulus is an only temporary support for the economy that could raise reflation only. A big part of the current stimulus has only entered into the U.S. equity markets because most of the beneficiaries of stimulus prefer to invest this free money in stocks to earn easy money.

COVID-19 has given birth to a new breed of investors who finds the stock market as an available tool to make easy money; while staying inside their homes. This change in investing terminology has been supporting global equity markets even at their lifetime high. This new breed of investors feels comfortable buying anything at any price. They do not want to think about a big jolt that could shake the global equity markets in the absence of supportive fundamentals.