Does this bear market mean a recession is coming?
A bear market is bad enough. But there is more bad news in store: bear markets are usually followed by recessions.
Over the past half-century, bear markets have been accompanied by recessions 83% of the time, according to analysis by Morningstar research vice president John Rekenthaler. The National Bureau of Economic Research (NBER), which declares the beginning and end of US recessions, defines a recession as “a significant drop in economic activity that spreads throughout the economy and lasts for more than a few months”. The typical measure used is quarterly gross domestic product (GDP), the value of goods and services produced in the United States
The S&P500 – a benchmark index commonly used to measure overall stock performance – has entered a bear market last week, which means its value has fallen at least 20% from the previous high. The index is currently down around 22% for the year as investors assess what interest rate hikes and skyrocketing inflation mean for their wallets. The Federal Reserve raises interest rates to reduce rising costs – but there is always the possibility that rising rates could tip the economy into a recession.
Right now, that’s definitely a concern. This week, Tesla CEO Elon Musk called the US recession “inevitable” in an interview with Bloomberg Newsand said it’s more likely than not we’ll see one in the short term.
Jamie Dimon, CEO of JPMorgan Chase & Co., said warned of an economic “hurricane”. In June, almost 40% of the 49 experts in macroeconomics interrogates by The Financial Times and the University of Chicago Booth School of Business’s Initiative on Global Markets said a recession would be declared in the first half of 2023, and nearly a third said it would occur in the second half of 2023. ‘next year.
Even Fed Chairman Jerome Powell said a recession is “certainly a possibility,” during testimony before the Senate Banking Committee this week.
Will we have a recession this year?
While Rekenthaler notes that five of the previous six bear markets have been followed by recessions, he says there are some caveats.
“By this measure, the odds of a really bad outcome decrease to 40%, down from the original 83%,” Rekenthaler wrote in his analysis. “Better news indeed.”
He also points out that the recession associated with the bursting of the dot-com bubble in 2000 was short and shallow.
What does this mean for the present?
At present, economic experts remain divided on whether we will experience a recession – or whether we already are or not, since the NBER does not call them in real time. Despite dire predictions from CEOs like Dimon and Musk, business research firm The Conference Board believes that GDP will be positive in the next quarter. While that may be overly optimistic, Rekenthaler says “signs of a recession are more distant than they were during the bear markets of 1974, 1982 and 2008.” For example, bear market recessions tend to occur after the unemployment rate has started to rise, which we do not see.
Rekenthaler concludes that while a recession this year is certainly a possibility – and becomes even more so with each rise in interest rates – he remains optimistic about near-term economic signals. “History suggests that the current bear market is likely a false alarm,” he says.
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