The S&P 500 Index closed at 3,666 on Thursday, down 24% from its record high of 4,796, officially entering a bear market. Investors are increasingly worried about the likelihood of a recession as the Federal Reserve raises interest rates even as the economy slows. Inflation, as measured by the Consumer Price Index (CPI) was up to 8.6%, the highest since 1981 and in response Federal Reserve raised the Fed Fund Rate by 0.75% this week and signaled an additional 0.50% to 0.75% increase in July. Meanwhile, the Consumer Sentiment Index (CSI) fell to 50.2, the lowest reading since the index began in 1952. Clearly the news is bad, the big questions remain: How much lower could the market go? How long will this last? And when the market will recover?
When we last entered a bear market in March of 2020 during the height of the Covid crisis, we presented Goldman Sachs research that characterized bear markets as either “Structural”, “Cyclical” or “Event Driven”. Goldman’s research asserts that there are distinct types of bear markets that have unique characteristics of decline, duration, and recovery. At the time we assessed the Covid crisis as an “Event Driven” bear market, a bear market driven by an event outside of the financial markets, such as a natural disaster, which impacts an otherwise healthy economy and market. Event driven bear markets are associated with a steep drop quickly followed by a steep recovery. Sure enough, this is the behavior that we saw during the Covid crisis.
However, the current bear market is different. We consider the current bear market to be “Cyclical”, a bear market driven by the business cycle and caused as a result of rising interest rates. As a result, it is unlikely that we will see the same type of quick recovery that we saw during the Covid crisis. Cyclical bear markets on average decline about 30%, last about 25 months, and take 50 months to recover.
It is important to point out that these are averages, not a prediction of what the current bear market will look like. However, history can be a helpful guide in knowing what to expect. It is likely that this bear market will be longer and more drawn out than the bear market of 2020. However, it is also helpful to remember that bear markets do end.