Do bear markets herald a recession?
We look back over more than 100 years of data to ask what this week’s severe market moves might signal for the economy.
Authors
After hitting an all-time high at the start of the year, the S&P 500 has plunged into bear territory this week. As a rule of thumb, the so-called bear market is when there is a 20% or more continuous fall in the stock market from peak levels.
With central banks around world raising interest rates in response to very high inflation, investors are already worried about recession risks. Typically, economic downturns have been triggered by the tightening in monetary policy.
The Federal Reserve raised interest rates a further 0.75% on Wednesday (the biggest move since 1994), leading a round of hikes from central banks around the world as the Swiss National Bank hiked 0.5% and the Bank of England by a further 0.25%.
The sharp sell-off in the equity markets in the run up to and following these announcements has intensified fears of a hard economic landing. Such a gloomy market reaction has many times in the past foretold a coming recession – but not always (see table, below).
While we’re not currently forecasting a recession in the US, the risks are skewed towards one. Investors can take some comfort that recessions don’t necessarily follow a bear market. That said, the odds are not favourable looking back at history.
Since the 1900s, the US economy has only managed to avoid a recession 30% of the time when a bear market has occurred.
These periods have also typically been shorter in length, with losses less severe compared to bear territory episodes with recessions. For instance, the S&P 500 dropped more than 20% during Black Monday in October 1987, but the economy did not experience a recession. Computerised-driven trading models were largely blamed for the crash in stock market.
Looking ahead, the longer the sell-off lasts for and the deeper the fall in prices, particularly against a backdrop where the Fed is hiking interest rate, then the higher the risk a recession could be on the cards.
Learn more about Schroders' global equities funds here.
Important Information:
This document is issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). It is intended solely for wholesale clients (as defined under the Corporations Act 2001 (Cth)) and is not suitable for distribution to retail clients. This document does not contain and should not be taken as containing any financial product advice or financial product recommendations. This document does not take into consideration any recipient’s objectives, financial situation or needs. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the product disclosure statement available at www.schroders.com.au or other relevant disclosure document for that fund and consider the appropriateness of the fund to your objectives, financial situation and needs. You should also refer to the target market determination for the fund at www.schroders.com.au. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed by Schroders or any company in the Schroders Group. The material contained in this document is not intended to provide, and should not be relied on for accounting, legal or tax advice. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. To the maximum extent permitted by law, Schroders, every company in the Schroders plc group, and their respective directors, officers, employees, consultants and agents exclude all liability (however arising) for any direct or indirect loss or damage that may be suffered by the recipient or any other person in connection with this document. Opinions, estimates and projections contained in this document reflect the opinions of the authors as at the date of this document and are subject to change without notice. “Forward-looking” information, such as forecasts or projections, are not guarantees of any future performance and there is no assurance that any forecast or projection will be realised. Past performance is not a reliable indicator of future performance. All references to securities, sectors, regions and/or countries are made for illustrative purposes only and are not to be construed as recommendations to buy, sell or hold. Telephone calls and other electronic communications with Schroders representatives may be recorded.
Authors
Topics