While technically not a bear market, it sure felt like one. From its September 20 high through Christmas Eve, the S&P 500 Index fell 19.8%, including a more than 7% one-week (December 14–21) decline unmatched since the 2008–09 financial crisis. Should the S&P 500 end the month where it closed on Christmas Eve, December would mark the third-worst month ever for stocks, behind only October 1987 (-21.8%) and October 2008 (-16.9%).
Market participants have had a lot to digest, including the risk of a policy mistake by the Federal Reserve (Fed), the China trade dispute, a government shutdown, cabinet-level departures from the White House (notably Defense Secretary James Mattis), the United States’ decision to pull troops out of Syria and Afghanistan, and communication mishaps by the Fed and Treasury Secretary.
These issues have given market participants too much uncertainty to shrug off. Here we offer some historical perspective on bear markets that were not accompanied by recessions, which suggests the worst of this sell-off may be behind us. We also include our latest thoughts on stock fundamentals, the Fed, the government shutdown, and whether Christmas Eve marked a major market low. For more of our views on the U.S. economy, please see today’s Weekly Economic Commentary
BEAR MARKET PERSPECTIVE
The S&P 500 Index came about as close as possible to the technical definition of a bear market (defined as a 20% or larger decline based on closing prices) without officially registering one. Based on that definition and going back to World War II, there have been 14 bear markets, with 7 of them accompanied by a U.S. economic recession and 7 without an accompanying recession. As shown in Figure 1, the recessionary bear markets were quite painful for stock investors, with an average S&P 500 decline of 37%.
A look at the non-recessionary bear markets offers some reassurance. Three of the past four nonrecessionary bears ended at 19% corrections (reaching the 20% threshold during intraday trading). The fourth, the 34% decline in 1987, occurred under very different conditions. The S&P 500 was up more than 40% year to date in August 1987, compared to just below 10% through the September 20, 2018, high, while long-term interest rates shot up from 6% to 9% in 1987. So while bear markets can occur without a recession, if the economy is still growing, market declines tend to stop at around a 20% decline.
Including 1987 and the four other non-recessionary bears before then (1947, 1962, 1966, and 1978), the average non-recessionary bear market decline is 24%. With stocks having nearly reached that point, the selling appears overdone to us, especially when considering the solid fundamentals supporting growth in the economy and corporate profits for 2019.
While the S&P 500 Index technically did not enter a bear market through December 24 by the most widely used definition, it is important to recognize that the index did fall more than 20% from its record intraday high on September 20 through the December 24 intraday low. Also consider that both the Nasdaq Composite and Russell 2000 Index are in bear markets, and the average stock is down more than 20%, making this experience feel like a bear market, especially when considering the ferocity of the December sell-off.
A look at a long-term chart of the S&P 500 does provide some reassurance. As shown in Figure 2, stocks have bounced back relatively quickly from non-recessionary bear markets. In the past four bear markets without recessions, the S&P 500 has taken an average of about 11 months to recover its prior peak. In the last two bear markets without recessions, the S&P 500 recovered in 3 months (1998) and 5 months (2011).