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Valuations and Recessions

Updated: Feb 22, 2023


There is currently an elevated interest regarding recessions. Google Trends shows a three-fold increase in search queries including the term over the past year. As appraisers, we’re not that interested. Why is that? Well, what is a recession? Most laypeople would likely define it something like “a time when the economy is doing poorly.” Under this definition, you might think of the 1987 stock market crash or the dot-com collapse as recessions. Yet the determinant of a recession is a decline in economic output,not the stock market. One technical definition of a recession is two consecutive declines in quarterly gross domestic product (GDP). So, if output decreases by even 0.1%, two quarters in a row, there’s a recession. Neither the 1987 crash nor the dot-com collapse meet that definition. While the layperson probably groups lower economic output, higher interest rates, inflation, and declining stock prices, all under the same category of “bad economic things,” appraisers have a keen understanding of their differences. Lower valuations don’t necessarily coincide with lower near-term economic output. The converse is also true. Observe the relationship between US GDP and the S&P 500 in 2021 and 2022.



We can see that GDP increased 0.7% in Q3 2021 while the S&P 500 increased 0.2%. In Q3 2022, a higher increase of 0.8% coincided with an S&P decline of 5.3%. Also, notice how small the swings are in GDP relative to those in the stock market. If you conflate recessions and declines in the stock market, you’re not alone. A recent Forbes article went so far as to declare that “a recession causes the stock market to drop.” However, historical evidence demonstrates the lack of any statistically significant correlation between GDP growth and stock returns, to say nothing of causation. (See, for example, this post by Larry Swedroe). In fact, the correlation in developed economies is slightly negative. Depending on your perspective, certain measures of the economy will be more important than others. For example, if you’re living paycheck-to-paycheck and have few assets, you could be much more concerned about unemployment rates than valuations. Output could be more important if you’re a government trying to balance a budget with lower tax revenues.

We had consecutive declines in quarterly GDP in 2022, so we were already in a recession by the aforementioned definition. The National Bureau of Economic Research (NBER) has its own subjective definition of a recession, but we won’t be awaiting their proclamations with bated breath. We are already keenly aware of the status of the drivers of valuations without knowing whether or not there is a recession.


Eric Sundheim, ASA Principal Mercovus Valuations

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