Stocks rallied on Thursday even after the US economy posted its second consecutive quarter of negative growth which technically translates into a recession– historical data shows markets are likely to continue moving higher in the short-term with the understanding that investors have already priced in the bad news.
Stocks initially fell following the release of second-quarter US GDP numbers, which showed the US economy shrank at an annual rate of 0.9% following a 1.6% drop in the first quarter.
Markets rebounded later on Thursday, however, with experts widely remaining unconvinced that the economy is in a true recession at this stage, citing strong job growth and solid consumer spending.
Historical data shows that markets usually tend to move higher in the weeks immediately following a second consecutive reading of negative GDP growth; that’s because most investors believe the worst is over for stocks before it’s over for the rest of the economy.
Since World War II, whenever GDP numbers hit a second straight quarter of declines, the S&P 500 gained an average of 1.3% over the next week, rising over 80% of the time, according to data from CFRA Research.
Stocks rose an average of 0.8% two weeks out, while rising 60% of the time during that time period as well as over the next month, CFRA data shows.
The trend is the result of investors anticipating and pricing in bad news before it happens: “Wall Street does not like uncertainty” and once it’s removed, investors are more confident—even in the face of more gloomy data down the road, explains Sam Stovall , chief investment strategist for CFRA Research.