Less than a month after the S&P 500 temporarily slipped into bearish territory, the benchmark stock market index officially fell into a bear market at the closing bell on June 13.
Year-to-date, the S&P 500, which includes Apple, Berkshire Hathaway, and Tesla, has tumbled by nearly 22 percent. The index now joins the tech-heavy Nasdaq Composite Index in a bear market. The Nasdaq has plummeted 31 percent this year.
All eyes will be on the Dow Jones Industrial Average to see if it will be the next domino to fall on the New York Stock Exchange. The Dow Jones, maintaining exposure to American Express and Coca-Cola, has dropped by about 16 percent year-to-date.
What We Know About Bear Markets
First, what’s a bear market? This is when the closing price of a stock index officially falls 20 percent from its most recent high. In contrast, the bull market starts when the index’s closing price rallies 20 percent from its most recent low.
The S&P 500 Index has seen 26 bear markets since 1928. Most bear markets were accompanied by economic recessions.
Historically, bear markets have been relatively short-lived, lasting an average of about 9.6 months. By comparison, bull markets enjoy an average length of 2.7 years.
When it comes to how deep this bear market could go, Goldman Sachs recently estimated that the S&P 500 could slide to approximately 3,650. Investment bank strategists came up with this figure by calculating that the index slumped from peak to trough by a median rate of 24 percent across 12 recessions.
But some analysts contend that investors could be targeting a 30 percent decline. The average decline since 1928 was about 30 percent and lasted nearly a full year, according to Ned Davis Research.
In 1973, 2000, and 2007, the S&P 500 cratered by an average of 51.4 percent before hitting its bottom. According to data from LPL Research, if the economy slips into a recession, the bear market could intensify, falling close to 35 percent on average and lasting nearly 15 months.
All About the Recession
Recession and inflation fears have been the contributing factors to the selloff in the equities arena.
Investors are starting to price in that the Federal Reserve could pull the trigger on a 75-basis-point interest rate increase during this week’s Federal Open Market Committee (FOMC) policy meeting as part of its efforts to combat rampant inflation.
Traders also kept a close eye on the U.S. Treasury market on June 13 as the two-year and 10-year yields inverted for the third time this year.
The short-term bond rose by 10.4 basis points to 3.385 percent, while the long-term bond dipped by 1.3 basis points to 3.358 percent. Earlier in the trading session, the five-year and 30-year Treasury yields had also briefly inverted.
The market considers this a top recession indicator since it has predicted seven of the past eight recessions. Experts use it as a go-to metric because it highlights that investors expect a decline in long-term interest rates amid declining economic activity.
But will a bear market be the gateway to the second recession in two years and higher unemployment?
According to Hartford Funds, there have been 26 bear markets since 1929, but only 15 recessions.
“Bear markets often go hand in hand with a slowing economy, but a declining market doesn’t necessarily mean a recession is looming,” the company wrote.
The unemployment rate has typically ticked higher during bear markets. In 1962, for example, when the bear market lasted for six months and the S&P 500 slumped by 28 percent, the jobless rate was 5.5 percent.
During the 1980–82 bear market, when the index declined by 27.1 percent, the unemployment rates in those three years were 7.2 percent (1980), 8.5 percent (1981), and 10.8 percent (1982). These years were also accompanied by weak gross domestic product numbers: minus 0.3 percent (1980), 2.5 percent (1981), and minus 1.8 percent (1982).
Of course, today’s labor market is hot, with the U.S. economy nearly recovering all of its jobs lost during the COVID-19 pandemic. Whether this bear market will douse the sizzling jobs market remains to be seen.
Still, market analysts warn that the various developments in the global economy are setting the stage for an economic downturn at home and abroad.
“The financial markets have struggled in their worst start to a year in decades,” John Lynch, chief investment officer for Comerica Wealth Management, wrote in a June 13 research note (pdf). “Surging inflation, the pivot in Fed policy, and historically pricey equity valuations were on the minds of investors as the year began, but the combination of COVID-19 lockdowns in China and Russia’s invasion of Ukraine has escalated volatility further with investors becoming increasingly concerned about the possibility of global recession sometime within the next year.”
Other prominent Wall Street figures think the chances of a recession are growing.
During the virtual 2022 Sohn Investment Conference, billionaire investor Stanley Druckenmiller said the United States would experience a recession next year.
“Inflation has never come down without a recession, and I think a recession is in the cards,” Druckenmiller told Stripe co-founder John Collison. “Given the extent of the asset bubble and the destruction in the markets, given what’s going on in Ukraine, given the zero-COVID policy in China … I strongly assume we are going to have a recession sometime in 2023.”
Speaking at a conference hosted by the Wall Street bank, Morgan Stanley CEO James Gorman revised his forecast and told investors that the odds of a recession are at 50 percent.
Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, told CNBC on June 10 that the market has started “discounting a recession in 2023.”
“I think we’re pricing in a mild recession,” he said. “I’m not saying how severe the recession actually will be.”
Buy the Dip?
Since the beginning of the pandemic, anytime there has been a decline in the market, the clarion call of investors had been to buy the dip.
Is this the same opportunity? BlackRock isn’t hitting the buy button just yet.
“We’re not buying the stock dip because valuations haven’t really improved,” BlackRock strategists wrote in a June 13 note. “There’s a risk of Fed overtightening, and profit margin pressures are mounting.”
Morgan Stanley strategists, led by Michael J. Wilson, noted in May that “it’s too early to get bullish.”
According to the American Association of Individual Investors’ survey of individual investor sentiment, 47 percent of investors are feeling bearish about the stock market over the next six months.
But the consternation among investors isn’t equal.
Last month, a Bankrate survey revealed that younger investors are using the market selloff to their advantage and buying the dip. The poll found that 43 percent of Generation Zers and 27 percent of millennials plan to invest more this year.
“Gen Z and millennial investors willing to invest more in stocks this year, despite market volatility and inflation, can see greater long-term reward for the discipline of hanging on and buying more at lower price points,” Greg McBride, chief financial analyst and senior vice president at Bankrate, said in a statement.
While timing the bottom can be a challenging feat, investment experts argue that if investors are buying the dip, they should be holding these securities for the long term. One strategy could be to dollar-cost average down these trading positions to reduce costs and minimize risks to weather the storm, according to strategists.