• Bear market is defined as a drop of more then 20%.
• Since 1945, recessions have followed 8 of the 13 times the market went into a bear market.
• In the five cases where the market dropped 19%, a recession followed one time.
As of today, the S&P 500 is trading at about 2500. So we are down 15% from the high of 2940. This excludes dividends. The title to the article is a bit of a play on words. The point is that recessions sometimes follow a bear market decline, but not always. The number of data points is limited, so we shouldn’t draw too many conclusions from the analysis. The data comes from an analysis by Bespoke and reported by CNBC here.
The data does raise an interesting point. I study and test just about ever market timing signal I have ever read about. Unfortunately, the brain isn’t very good at processing analytical information. There is a confirmation bias that says we tend to overweight data that supports our position. If we see a chart that shows a bear market followed by a recession, we may falsely conclude it is a reliable signal. The data above shows that life isn’t nearly as certain as this. A bear market may be followed by a recession, but it isn’t certain.
In my last post here, I posted a set of slides that cover key indicators of the economy. It is possible that a large market drop can lead to a recession if consumer confidence falls and people stop spending. At least for now, we don’t get very many signals from the macro data that confirm we are at the doorstep of recession. Of course, we’ll keep watching the signals but in the meantime, holding a diversified portfolio of stocks and bonds looks to be the prudent course of action. I am willing to make changes based on new information, but short of some kind of evidence that this is the bear, I’d rather not sell into these weak markets with poor liquidity and indicators saying it is way oversold. In the face of uncertainty we take comfort from holding a safe mix of both stocks and bonds.
Here is to a Happy New Year.