History shows that when the S&P 500 enters a bear market, it tends to stay for a while.
Consecutive falls left the SPX capitalization benchmark,
a drop of 18.7% compared to its record on Thursday, January 3, closing at 3,900.97. A 20% drop from a recent peak is the traditional definition of a bear market. That would require a close below 3,837.25, according to Dow Jones Market Data.
The Dow Jones Industrial Average DJIA,
it is not far behind, finishing at 31,253.13, 15.1% below its closing record on 4 January. A low below 29,439.72 would put the top tier indicator in a bear market.
Of course, many investors and analysts see this 20% definition as too formal if not obsolete, arguing that stocks have been behaving bearishly for weeks.
To date, 61% of individual S&P 500 companies were in bearish territory, noted Mike Mullaney, director of global market research at Boston Partners.
“We’re a little there, but it hasn’t yet appeared on the broad index,” he said in an interview Thursday.
And keep in mind that if the S&P 500 closes below the threshold in the next few days, the start of the bear market would fall back to its January 3 peak. A bearish market ends once the S&P 500 has risen 20% from the low.
Okay, what does the story say about what happens once a bear market starts?
There have been 17 bearish – or near-bearish – markets since World War II, Ryan Detrick, chief market strategist at LPL Financial, said in a note Wednesday. Overall, the S&P 500 has had to fall even further once it starts. And, he said, bearish markets have lasted, on average, about a year, producing an average peak-down decline of just under 30%. (see table below).
The sharpest fall, a sharp drop of at least 57%, occurred in the 17 months that marked the 17-month bearish market that accompanied the 2007-2009 financial crisis. The longest was a 48.2% drop that lasted almost 21 months in 1973-74. The shortest was the nearly 34% drop in just 23 trading sessions, as the onset of the COVID-19 pandemic caused a global crash that hit rock bottom on March 23, 2020. and marked the beginning of the current bullish market.
The S&P 500 moved into bearish territory last week before a sharp rebound on Friday the 13th that halved its weekly losses. Another sharp rebound was seen on May 17, but gains were eroded more than in the next session following the negative results of retail giant Target Corp. TGT,
he stressed fears that inflationary pressures would begin to affect margins.
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The profits of Target and, a day before, of Walmart Inc. WMT,
“I’m worried that bad things may start to happen in the U.S. economy,” Tom Essaye, founder of Sevens Report Research, said in a statement Thursday.
“That is, the duration of high inflation has infiltrated the lower income cohorts of the economy, and they are now reacting rapidly. And as inflation remains high and the economy slowing down, this will increase the distribution of income, and the concern is that the margin problems faced by TGT and WMT will spread to other parts of the commercial space and the market more widely, “Essaye wrote. . .
Mullaney of Boston Partners is concerned that Wall Street analysts have yet to catch up. While earnings expectations for emerging market firms and broader developed market indices have fallen, this is not the case with the S&P 500, he noted. This indicates that analysts covering the S&P 500 are “behind the curve,” which could be one of the last shoes to fall.