With the stock market on one of its worst losing streaks in decades amid a relentless selloff that has pushed the S&P 500 nearly 20% below its record highs, recession risks are rising—but history shows that not all bear markets lead to long term downturns and stocks can often rebound over the next year.
The benchmark S&P 500 index briefly fell into a bear market last Friday—at one point down over 20% from its peak in January—and continues to hover near that territory as surging inflation and rising rates lead to recession fears.
The last bear market was in March 2020, when coronavirus pandemic lockdowns sent the U.S. economy into a recession, but that downturn was uncharacteristically brief compared to others in the past (the bear market between 2007 and 2009 lasted for 546 days).
“No two bear markets are exactly alike,” notes Bespoke Investment Group, pointing out that eight out of 14 prior bear markets since World War II have preceded recessions, while the other six did not.
Once the S&P 500 does hit the 20% threshold, stocks typically fall by another 12% and it takes the index an average of 95 days to hit the end of a bear market, according to Bespoke data.
In more than half of the fourteen bear markets since 1945, the S&P 500 hit a low point within two months of initially falling below the 20% threshold—and forward returns were largely positive, Bespoke points out, with the index rising an average of 7% and nearly 18%, respectively, over six and twelve month periods.
If the U.S. economy can avoid falling into a recession, then stocks would be in a better position going forward: Bear markets that occur before a recession are more prolonged (lasting 449 days compared to 198 days with no recession) with steeper losses (an average decline of 35% compared to 28%), according to Bespoke.
It has been several decades since the stock market has had such a long streak of heavy losses. The Dow Jones Industrial Average recently posted its eighth down week—its longest losing streak since around the time of the Great Depression in 1932, while the S&P 500 and tech-heavy Nasdaq Composite have moved lower for seven straight weeks, their longest losing streaks since the dot-com crash in 2001.
The last four times the Nasdaq posted such a streak of weekly losses of 1% or more was in 1973, 1980, 1990 and 2001, according to Bespoke data. In every instance, those streaks occurred “either right before or very early into a recession.”
What To Watch For:
The S&P 500 has only posted a losing streak of seven weeks or more three times—in 1970, 1980 and 2001, according to Nationwide’s chief of investment research, Mark Hackett. “Unfortunately, the index was negative over the next 12-months each time,” he says. The index could tank by between 11% and 24% if the economy falls into a recession in the near-term future, major Wall Street firms have warned.
“Persistent inflation, another Fed policy mistake, and recession fears have unnerved investors,” with the S&P 500 briefly falling into bear market territory, says Edward Moya, senior market analyst for Oanda. The widespread selling will likely “only accelerate” as investors will remain wary until the Fed “starts to show signs that they are worried about financial conditions and that they may stop tightening so aggressively.”