Look at history - stock declines don't have to be a sign of crisis
Despite some turbulent weeks where American stocks have fallen by over 10 percent, PFA’s chief strategist Tine Choi Danielsen urges people to stay calm. From a historical perspective, such stock dips are far from unusual. They occur on average once every 19 months, and it is far from the norm that they are followed by recessions or prolonged stock downturns.
Last week, the American S&P500 stock index fell by 10 percent from its peak in mid-February. This is technically termed a correction. According to PFA’s chief strategist, Tine Choi Danielsen, corrections occur on average every 19 months, and although they are unpleasant to experience, there is more often light than darkness on the other side of the stock correction.
If one is looking for the proverbial canary in the coal mine, stock corrections at the level we have seen in recent weeks are therefore not particularly reliable candidates.
“When American stocks have fallen by 10 percent or more, we have had a recession within the subsequent 12 months 44 percent of the time. As long as the American economy is not in recession, stock prices have, on the other hand, recovered the loss and more within 3 months,” says Tine Choi Danielsen.
She elaborates that since 1928 we have had 59 instances of declines over 10 percent in the S&P500 index, and the decline stopped at 10 percent in 10 of these instances, while prices fell over 20 percent 17 times.
Tariffs, Threats, and 'Trump-session'
Although the current stock dips are still moderate, they indicate that we are in a period of increased economic uncertainty – and this can also be felt by American consumers.
“We have had very significant declines in consumer confidence, which is now approaching the levels we saw in 2022, when many feared an imminent recession. This has led to talk of a so-called ‘Trump-session,’ that is a recession caused by his aggressive trade policy. So far, however, economic indicators suggest that we will see a minor growth slowdown rather than a full-blown recession,” says Tine Choi Danielsen.
She elaborates that it is currently the uncertainty that is causing consumers to react, as threats of tariffs, price increases, and cuts to the public budget have increased the incentive to hold onto money.
“So far, we have primarily experienced the most growth-negative side of Trump's election program in the form of tariffs, public layoffs, and deportations, while we have yet to see the growth-positive side in the form of tax cuts, deregulation, and increased investments in American manufacturing. If that begins to happen, it could curb the negative sentiment we have seen recently,” says Tine Choi Danielsen.
She also underlines that the S&P500 index has risen 43 percent over the last 2 years despite the recent decline. Earlier this year, this led PFA to harvest some of the return gains and reduce the stock holding, but despite that PFA's chief strategist still believes in positive stock returns in 2025.