The S&P 500, on an intraday basis Friday, 20 May, broke through its prior low to reach bear market levels trading more than 20% below its record high reached in January, but it did not close there. Instead, it reversed the day’s steep losses and ended the day just slightly positively. The Nasdaq Composite, which is driven by technology stocks, has been in a bear market since March. Some Wall Street pros consider it a bear market if a 20% decline is reached in an index on an intraday basis, but others insist the index must close at that level for the bear market to be effective. Many investors and analysts see that 20% definition as an overly formal if not outdated metric, arguing that stocks have been behaving in a bear-like fashion for weeks. The S&P 500’s seventh weekly decline marked the longest losing streak since the dot-com bubble burst more than two decades ago.
Often a bear market precedes a recession. But a bear market describes a decline of 20% in the value of stocks or other securities from its last peak, while a recession is a general decline in a country’s production of goods and services, measured usually as two consecutive quarters of shrinking growth as determined by the National Bureau of Economic Research. A two-year bull run in stocks that began at the depths of the coronavirus panic came close to crashing into a bear market Friday. Shares are selling off in the hands of investors who are convinced that a recession is all but unavoidable
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All of this decline has been driven by two major forces: one is inflation and how stubbornly high it is. And the second is how aggressive the Federal Reserve will likely be to get it under control. The consumer discretionary sector has been the worst-performing group in the S&P 500 since the index’s January high, sinking 34%. The only S&P 500 sector to gain during that stretch is energy, which is up 42%. Target Corp. plunged the most since Black Monday in 1987, a day after Walmart Inc. suffered a similar fate, on signs that runaway inflation is hurting the US consumer and eroding profit margins. Investors are worried that corporate earnings will come under pressure, businesses will invest less money, and consumers will cut back on their spending.
Since 1929, the S&P 500 has entered a bear market 17 times, including Friday, according to data from CFRA Research. The longest period lasted 998 days, from September 1929 to June 1932. The shortest was just 33 days, from Feb. 19, 2020, to March 23, 2020, CFRA’s data show. On average, bear markets result in a decline of roughly 38%, although since 1946, the average loss has been less than 33%, according to CFRA.
Many of the bear markets since World War II had four things in common, according to Sam Stovall, the chief investment strategist at CFRA. They are a rate-tightening cycle by the Fed, an inverted yield curve, geopolitical tensions, and a recession that occurred within 12 months. Morgan Stanley predicts a 27% chance of a recession in the next 12 months, a probability that jumped from just 5% in March.
The whole thing comes down to whether or not there’s going to be a recession. In the last three bear markets, where there was no recession, the decline was 21.3%, and we’re basically there. In the last three bear markets, when there was a recession, the average decline was 47.9%. Those bear markets were in 2000, 2008, and 2020.
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Investors tend to switch to safe but extreme strategies such as selling all of their investments and either holding cash or investing the proceeds in much more stable financial instruments, such as short-term government bonds. For Investors looking to maintain positions in the stock market, there are good places to hide, though. [JT1] The energy, utilities, and healthcare sectors are outperforming. And even in a recession, defensive sectors like consumer staples or utilities should continue to outperform.
Investors also tend to invest in these sectors through index funds or exchange-traded funds, which track a market benchmark. For example, investing in a consumer staples ETF will give you exposure to companies in that industry, which tends to be more stable during recessions. An index fund or ETF offers more diversification than investing in a single stock because each fund holds shares in many companies.
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