Is The US Already In Recession?

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by Tyler Durden
Wednesday, May 25, 2022 - 10:40 PM

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%.

And with Q1 already negative, it means we are just 1.8% away from a full-blown technical recession.