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While it may be argued that this does not constitute a recession, Google searches for "recession" spiked in July. My inbox kept filling up with blog comments or warnings about recession.

And markets soared! The S&P 500 returned 9.2%, the OMX Nordic 40 an impressive 11.5%.

Baffled and befuddled? I'd like to quote UC Berkeley professor Panos N. Patatoukas: "A long line of research finds that stock returns are unrelated to news about GDP growth."

One reason given is that bad GDP news may be offset by interest rate cuts. This time, however, nothing of the sort happened. On the contrary, the Federal Reserve raised its key interest rate by 75 basis points for the second time in a row, while the ECB raised its key interest rate by 50 basis points – the first increase in eleven years (although the deposit rate is still only zero).

Yes, long-term market rates fell, but not by that much. The yield on 10-year US treasuries fell by 33 basis points. That alone would not fuel such estival exuberance. Less hawkish central bank statements implied a somewhat less draconian outlook for interest rates, but that should be discounted in the long rates.

It is fair to say that July ended on a decidedly risk-on note. To wit: The spread on US high-yield bonds fell by more than 100 basis points. Similar declines have only occurred four times after the end of the great financial crisis.

Perhaps fear-off would be a better moniker. Overwhelmed by bad news and spooky forecasts, many investors had prepared for the worst. Allocation to equities had fallen, margin accounts were reduced. Given time to breathe and reconsider, many might have come to think that the worst scenarios were a bit overblown. Or so it looked at the end of July.

The take-away? Never forget that what the market sees, the market discounts. There is a wide margin of error, from gross overshooting to deep undershooting, so we can never know if spot prices are spot on. But we can rest assured that bad news and spooky outlooks are never neglected. Stock prices are as scared as you are.


"Stock Market Returns and GDP News"
Panos N. Patatoukas,
Journal of Accounting, Auditing & Finance, October 2021


 Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager’s skill, the fund’s risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments. This is marketing communication.



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