The S&P 500 flirted with bear market territory in December, with stocks trading downward on fears of rising interest rates, slowing economies and trade concerns. On Christmas Eve the index closed at 2,351.10, down 19.78 percent from its September 20 peak of 2,930.75. You need a 20 percent decline to qualify as a bear market. Even though stocks are enjoying a nice rebound from their December declines as this is written, our near miss of a bear market presents a good opportunity to look back on the characteristics of historical bear markets and their causes.
Over the last 70 years the S&P 500 has endured ten bear markets, beginning with the one caused by the Recession of 1949 and ending with the Great Financial Crisis that occurred late last decade. That means the index has averaged a bear market every seven years, while we have had nearly ten years since the last one ended. Of those ten, the average peak to trough decline was 34.2 percent (I’m ignoring dividend return in this stat and every other return-related stat in this article). The biggest selloff in the last 70 years was during the Great Financial Crisis, when stocks fell 57 percent from their peak.
Part of the concern causing the recent volatility is that the U.S. will see a recession in the near future. There is disagreement over how soon and how bad such a recession will be, but it’s worth remembering that we’ve had recessions that didn’t lead to bear markets. Recessions that began in 1953, 1960 and 1980 saw stocks decline, but none reached the 20% drop needed to qualify as a bear market. At the same time, we’ve seen two different bear markets develop that had no associated recession. In both 1962 and 1987 the S&P 500 fell by 28 percent and 34 percent, respectively. Valuations were high in both instances (they aren’t now) and there were other idiosyncratic factors at play. Much of 1962’s decline can be attributed to the Cuban Missile Crisis (don’t tell North Korea), and in 1987 markets hadn’t fully adapted to programmatic trading.
Another concern of late has been whether the Fed is hiking rates too fast. History suggests this is a worthy question, as five of the recessions (and four of the bear markets) in the last 70 years are thought to have been caused at least in part by an aggressive Fed. But can we classify the current Fed’s rate trajectory as aggressive? Many would argue that with rates still near historical lows, interest rates still haven’t been “normalized.”
Commodity spikes have been another historical source of recession and ensuing bear market. For our purposes, a commodity spike, is defined as a 100 percent increase in the price of oil over an 18-month period. This has been responsible, in part or in full, for five recessions in the last 70 years, four of which saw associated bear markets.
The JP Morgan Guide to the Markets (for which I credit nearly all of this article’s data) lumps the causes of recessions and bear markets into three categories: commodity spikes, aggressive Fed action and extreme asset valuations. Commodity spikes and extreme valuations certainly don’t apply to present times. Oil prices are barely above $50 per barrel, while the forward looking price-to-earnings ratio of the S&P 500 ended 2018 at 14.4, below its 25-year average of 16.1. That leaves the Fed, and whether or not they’re being too aggressive depends on who you ask.
Source: JP Morgan’s 1Q Guide to the Markets