Recessions May Be Mild, but Market Reactions Aren’t

Market damage often exceeds a recession’s damage. Whether that recurs this year is a grand conundrum.

Wall Street is buzzing with disagreements over whether 2023 will produce a soft landing (no recession), a bad recession or a mild recession. And the predominant view is that it will be mild. The latest entry in the mild camp is asset management titan BlackRock. A BlackRock research paper predicts that a contraction in gross domestic products of just 1% will hit the U.S. in the second and third quarter.

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The economic downturns since 1990 have been small, with the nasty exception of the Great Recession of 2007 through 2009, history shows. Still, the market reactions to these recessions, however harsh the economic damage was, have been tough. So that leads to the question of whether stocks will get slammed in any upcoming GDP drop.

In the Great Recession, which lasted from December 2007 to June 2009, the economy slumped 4.7%. Over that spell, which included a global financial crisis, the S&P 500 lost 58%. Before that, the 1990 Gulf War recession featured a mere 1.5% GDP shrinkage and a 20% market dip. The 2001 dot-com recession’s economic toll was even lighter, just 0.3% down, but a whopping 51% stock dive.

What about the brief pandemic recession of early 2020? The economy plunged 19.2%. The market got skewered worse, off 32%. This period was an anomaly, as both economic and market problems quickly disappeared. Rapid fiscal and monetary stimulus levitated both the economy and stocks quickly.

The argument that stocks might not suffer too much in a mild recession rests on the theory that the present situation also is anomalous. One big reason: Households still have a lot of savings left over from COVID-19’s onset. Also, this bullish scenario goes, 2022’s market wipeout, with the S&P 500 falling 19%, might mean that the 2023 recession already has been priced into stocks. That’s the contention of Vanguard Group’s CIO, Gregory Davis, which he put forth last fall.

The opposite side is that 2022’s market behavior was fed by high inflation and interest rates, which were a shock to the system—and a recession is a whole new disaster.

With a Recession Enroute, Should Pension Funds Be Worried?

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Tags: BlackRock, dot-com bubble, Financial Crisis, Great Recession, Gulf War, mild recession, Pandemic, recession, S&P 500

The Pension Benefit Guaranty Corporation announced the approval of two supplemental assistance packages today.

The first was for the Teamsters Local 641 plan. The Union City, New Jersey-based plan had 3,610 participants and will receive an additional $96.1 million on top of the $516.9 million received in March 2022.

The other plan approved today was the Printers League Graphic Communications International Union (GCIU) Local 119B New York Pension Plan. The East Farmingdale, New York-based plan, for workers in what is now known as the Graphic Communications Conference of the International Brotherhood of Teamsters, has 1,213 participants and will receive an additional $96.1 million on top of the $516.9 million received in August 2022.

According to the GCIU Local 119B Plan’s initial application, the plan became insolvent in August 2021. The supplemental application, filed in April 2022, originally requested approximately $85 million. The final figure of $96.1 million in supplemental assistance likely includes interest generated since April, though the GCIU Local 119B Plan did not return a request for comment.

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According to the PBGC, the Special Financial Assistance Program has now issued $45.7 billion to struggling pension plans as of today.

The SFA provision of the American Rescue Plan Act allows for PBGC funding for severely underfunded multiemployer pension plans. Funds that receive assistance must monitor the interest resulting from the grant money as separate from other sources of funding. The PBGC requires that at least two-thirds of the money it provides be invested in “high-quality fixed income investments.” The Final Rule on Special Financial Assistance, issued in July 2022, states that the other third can be invested in “return-seeking investments,” such as stocks and stock funds.

Tags: PBGC, Special Financial Assistance, Teamsters