Is The US Already In Recession?
Do recessions lead to bear markets, or is it vice versa?
That is the question Bloomberg Markets Live commentator Ye Xie asks today, and with good reason: with the S&P having fallen about 18% from its January peak, just a hair shy of the typical bear-market definition of a 20% drawdown, everyone is talking about an imminent recession. But here Yie spots a mathematical oddity: if the S&P 500 falls into a bear market and a recession follows in coming months, that would be the first time in modern history that a bear market has foreshadowed an economic downturn.
As Xie explains his methodology, he counted 11 times when the S&P 500 fell at least 20% from previous records since 1929. (That excludes most of the periods from the 1930s and 1940s because the S&P 500 didn’t climb back to the its pre-Great Depression peak until the 1950s.)
Here are Xie's conclusions:
- It took (a median of) four months for markets to trough. The median peak-to-trough drawdown was 34%
- There were three false alarms, including 1987, 1966 and 1962, when the S&P fell more than 20% without an imminent recession
- Recessions don’t always cause a bear market. Stocks fell less than 20% during recessions in 90-‘91, 1980, ‘60-’61 and ‘53-‘54 for example
- The punchline: Bear markets never occurred before recession started. The 20% threshold was typically hit roughly 2-3 months after the economic contraction started.
As Xie points out, the 20% threshold is of course arbitrary and yet that's what traditionally is viewed as a bear market. Still, stocks fall more during, rather than before, an economic contraction. The bigger point is that if indeed the S&P entered a brief bear market last Friday when the S&P dipped below 3,855 and bounced immediately, then it's safe to conclude that the US economy is already in a recession, unless this time is different. But we doubt it: after all just a few hours earlier the Atlanta Fed announced that its GDPNowcast tracker for Q2 GDP dropped from 2.4% to 1.8%.
On May 25, the #GDPNow model nowcast of real GDP growth in Q22022 is 1.8%. https://t.co/T7FoDdgYos #ATLFedResearch Download our EconomyNow app or go to our website for the latest GDPNow nowcast. https://t.co/NOSwMl7Jms pic.twitter.com/EOQVx4h2Wy— Atlanta Fed (@AtlantaFed) May 25, 2022
And with Q1 already negative, it means we are just 1.8% away from a full-blown technical recession.