A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., July 19, 2022. REUTERS/Brendan McDermid

NEW YORK, July 28 (Reuters) – The prospect of a recession in the United States could mean more pain for struggling stocks, despite a recent rebound that took the benchmark index to its highest level in more ‘a month.

Thursday’s data showed the US economy contracted for the second straight quarter – meeting an oft-cited definition of a recession. The robust job growth accompanying the current downturn has sparked debate over whether the economy is really in recession this time around, and the official arbiter of recessions – the National Bureau of Economic Research – does not has not yet declared.

If the United States turns out to be in a recession, however, history shows that the hardships equity investors have endured this year could get even bumpier.

According to the Wells Fargo Investment Institute, bear markets accompanied by a recession tend to be steeper than those without an economic downturn. Among bear markets since 1946, the average decline with a recession was 35.8% compared to an average of 27.9% without a recession, according to their data.

At its mid-June low, the S&P 500 had fallen 23.6% from its high. It has since rebounded more than 10%.

Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute, said the stock market may have only partially priced in an economic slowdown, despite falling sharply this year.

“We have made good progress towards discounting from a recession at least relative to historical averages. The bad news is that there could be up to 10% more downside from recent lows, he said.

Of course, not everyone believes that the US economy is in recession. Federal Reserve Chairman Jerome Powell said on Wednesday that a strong jobs market made the onset of a recession unlikely, as the White House pushed back aggressively on talk of the recession as it seeks to calm voters ahead of the November 8 midterm elections.

Some investors also pointed to data showing the economy remains on solid footing. Corporate earnings, for example, continue to rise, with second-quarter S&P 500 earnings on track to have risen 7.6% from a year ago, according to Refinitiv IBES.

Yet Deutsche Bank data showed that since 1947 there have never been two successive quarters of negative economic growth without a concurrent recession. Thursday’s data showed gross domestic product fell at an annualized rate of 0.9% last quarter. Read more

A recession is “almost a slam dunk over the next 12 months,” wrote Jim Reid, the bank’s thematic research manager, but added that he wants to “see more evidence of the jobs recovery before than we call the current US environment a recession. .”

In another worrying sign, a key part of the US Treasury yield curve has been inverted for much of this month, with the yield on the 2-year note crossing above the 10-year yield. Such reversals have historically preceded US recessions. Read more

Inflation at a 40-year high and weaker growth could further stoke fears of stagflation, a toxic mix of slowing growth and high inflation that has hurt stocks in the past. UBS Global Wealth Management said earlier this month that the S&P 500 could fall to 3,300 under such a scenario, down 18% from Wednesday’s close.

Janus Henderson Investors recommends “a defensive stance within risk assets to weather the unfolding downturn,” the firm’s chief research officer, Matt Peron, said in emailed comments. Peron likes stocks of healthcare and software companies in the current environment, as well as stocks of real estate investment trusts.

“We continue to believe that we are not off the hook yet on the pressure the economy will feel from inflation and rate increases,” Peron said.

Reporting by Lewis Krauskopf; edited by Ira Iosebashvili and Nick Zieminski

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