S&P 500 hovers near bear market. Its ferocity may depend on the economy.

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Many investors are convinced that US stocks are already in a bear market, even though the benchmark S&P 500 has yet to technically confirm this. History shows that the pace of any decline may depend on whether the economy avoids a recession.

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It sounds obvious, but the debate over whether the economy is headed for a recession is far from settled. Much may still depend on policy decisions and luck.

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There is definitely a reason to panic. Sam Stovall, CFRA’s chief investment strategist, noted in a Monday note that year-over-year increases in inflation that exceed the mean by one standard deviation or more, as it is now, have been post-recession.

While there is no guarantee that a recession is in the offing, a record of bear markets during such recessions can destabilize investors, Stovall wrote.

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CFRA

“The disappointing historical implication is that every time the Y/Y change in the headline CPI exceeded the average by more than one standard deviation, the US fell into a recession and the S&P 500 suffered through a bear market,” he said. see chart above).

Investors and traders say that hopes of a market-led recession coming soon are increasing by the day.

Furthermore, these bear markets tended to be deeper than those not associated with recessions, averaging 38% versus 28%, respectively, Stovall found. Furthermore, bears that are bearish last longer (15 months on average) than bears associated with bears (on average six months).

A close below 3,837.25 would mark a drop of 20% or more for the S&P 500 SPX,
-0.81%
Ending its January 3 record, meeting the widely used definition of a bear market. If the S&P 500 closes below the threshold, the start of the bear market will return to its January 3 peak.

The S&P 500 recently came closer, trading as low as 3,810.32 on Friday, but it dodged the bears by bouncing ahead of the closing bell. The index climbed on Monday, followed by a 0.8% fall at 3,941.48 on Tuesday. Analysts and investors have argued that the market behavior so far in the brutal period of 2022 has been in line with the previous bears.

Investors and traders say that hopes of a market-led recession coming soon are increasing by the day.

Nasdaq Composite Comp,
-2.35%
entered a bear market earlier this year, while the Dow Jones Industrial Average (DJIA),
+0.15%
Has fallen more than 13% from its January 4 record finish.

Stovall noted that there have been 12 bear markets since 1948, and an equal number of bearish ones.

And while most bear markets typically started with an impending recession, not all bear markets were accompanied by one. There were three bear markets — 1961, 1966 and 1987 — that occurred independently of recessions, he said, while three US recessions — 1953, 1960 and 1980 — were not preceded by bear markets.

When stocks anticipated a recession by slipping into a bear market, the peak in prices occurred on average seven months before the start of the downturn, whereas only once, in 1990, did a downturn and a market peak occur simultaneously.

“Encouragingly, while the recession lasted an average of 10 months, the bear market fell an average of four months before the end of the recession,” Stovall said.

Credit: www.marketwatch.com /

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