The S&P 500 is hovering near a bear market. Its ferocity may depend on the economy.

Lots of investors are convinced that US stocks are indeed in a bear market, even if the S&P 500 hasn’t technically confirmed it. History suggests that the severity of any downturn may depend on whether or not the economy avoids a recession.

This sounds obvious, but the debate over whether the economy is heading into a recession is still far from settled. There may still be a lot of dependence on policy decisions and luck.

There is definitely cause for stress. Sam Stovall, chief investment analyst at CFRA, noted in a note Monday that annual increases in inflation that exceed the mean by one or more standard deviations, as now, have been followed by a recession.

Stovall writes that while this doesn’t guarantee a recession will be in store, the record of bear markets during these downturns may leave investors feeling unsettled.

CFR

“The worrying historical implication is that every time the year-over-year change in the headline CPI exceeds one standard deviation above the mean, the US falls into a recession and the S&P 500 suffers through a bear market,” he said. diagram above).

Opinion: Investors and traders say the chances of a market-led recession sooner than expected are increasing day by day

In addition, these bear markets ended up being deeper than those that weren’t correlated with a recession, falling an average of 38% versus 28%, respectively, Stovall found. Furthermore, bears experiencing sluggish periods are expected to be longer (median of 15 months) than non-recessive bears (median of six months).

A close below 3837.25 indicates a decline of 20% or more for the S&P 500 SPX,
-0.81%
from january. 3 Standard termination, meeting the widely used definition of a bear market. If the S&P 500 closes below the bottom line, the start of the bear market will go back to January 4. 3 tops.

The S&P 500 came close recently, trading as low as 3,810.32 on Friday, but avoided the bear as it bounced before the closing bell. The index rose on Monday, followed by a 0.8% drop on Tuesday to close at 3,941.48. Analysts and investors have argued that market behavior so far in what was brutal in 2022 has been in line with previous bears.

Opinion: Investors and traders say the chances of a market-led recession sooner than expected are increasing day by day

Nasdaq Composite,
-2.35%
It entered a bear market earlier this year, while the Dow Jones Industrial Average DJIA,
+ 0.15%
It is down more than 13% since its January 3 date. 4 records completed.

Stovall noted that there have been 12 bear markets since 1948, and a similar number of recessions.

And while most bear markets were caused by impending recessions, not all bear markets were accompanied by one. He said that three bear markets – 1961, 1966 and 1987 – occurred independently of recessions, while three US recessions – 1953, 1960 and 1980 – were not preceded by bear markets.

When stocks predicted a recession by slipping into a bear market, a price peak occurred, on average, seven months before the onset of a recession, while a recession occurred only once, in 1990, and the market peak occurred together.

“Encouragingly, while an average of 10 months of recession was expected, bear markets bottomed out an average of four months before the end of the recession,” Stovall said.

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