Old Bear, New Tricks - Key Takeaways

DEWITT, Mich. - March 15, 2023 - PRLog --

• After a strong rally to kick off 2023, renewed inflation concerns have sparked worries of extended rate hikes, weighing on equity-market performance, including a pullback last week that has left the S&P 500 slightly in positive territory for the year.
• The Fed is hiking much deeper into a bear market than has historically been the case, and the Fed is not yet at a stage where it can take its foot off the brake. But we are significantly closer to the end of its rate-hike campaign than the beginning.

This bear market is now 298 days old, putting it just a few days shy of the average age of a bear1. Maturity, in and of itself, is not a signal of a bottom. However, with history as our guide, this downturn, as well as every one that has preceded it, has had an expiration date.

Fed policy: Elevated inflation is requiring an aggressive and extended rate-hike campaign.

• History:
  • Historically, at this point in a bear market, the Fed was often shifting to a more accommodative policy approach, as economic conditions had already begun to deteriorate.
• In these prior periods, a recession began, on average, seven months prior to this stage (298 days after the market peak) in the downturn. A notable exception was the '87-'88 downturn (Black Monday), which was not accompanied by a recession¹.
• History:
• Historically, at this point in a bear market, the Fed was often shifting to a more accommodative policy approach, as economic conditions had already begun to deteriorate.
• In these prior periods, a recession began, on average, seven months prior to this stage (298 days after the market peak) in the downturn. A notable exception was the '87-'88 downturn (Black Monday), which was not accompanied by a recession¹.

Employment conditions: The labor market remains historically tight, supporting consumer spending.

• History:
• By the 13th month after prior market peaks, the economy was frequently a few quarters into a recession.  The 2001 and 2008 periods saw the recessions extend another six months.
• On average, the unemployment rate had already risen by 0.7% at this stage, with average unemployment at 5.9%, compared with 3.6% today¹.

Market performance: Making progress toward a new bull market, but volatility has returned amid this phase of uncertainty around the outlook for upcoming rate hikes and economic growth.

• History:
• The stock market is currently about 19% off its record high on January 3, 2022. Prior bear markets were down by a very similar amount at this stage. Excluding the decline in '08/'09 stemming from the global financial crisis, the average decline to this point is almost identical to the current pullback.

Source: 1. Bloomberg, past performance is not a guarantee of future performance.