Do bear markets herald a recession?

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.

Want to learn more about investing in global equities with Schroders? Please visit our website.


........
This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. It is intended solely for professional investors and financial advisers and is not suitable for distribution to retail clients. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.

Schroders Australia

Established in 1961, Schroders in Australia is a wholly owned subsidiary of UK-listed Schroders plc. Based in Sydney, the business manages assets for institutional and wholesale clients across Australian equities, fixed income and multi-asset and...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.

Comments

Sign In or Join Free to comment