What to Expect in a Bear Market

The stories of the legendary stock-market sell-offs are often reduced to two or three words. Black Tuesday. Dot-Com bubble. Subprime mortgages. Long-Term Capital. The Pandemic. We can now add "Trump Trade Wars" to this undistinguished list. The S&P 500 has not officially entered a bear market, which is defined as a 20% drop from the recent highs. But it is pretty close at -17%. The dust hasn't settled on the administration's tariff plans, though, let alone on the responses from around the globe, and investors have been inclined to sell first and ask questions later. If the S&P 500 does drop another 300 basis points, then U.S. investors will be entering their ninth bear market since the 1960s. How did those go? The average peak-to-trough decline for the S&P 500 during the previous eight bear markets was 38% (compared to the current 17%). The market weakness on average lasted 16 months (compared to the current 1.5). We note that the past two bear markets have been shorter than normal, averaging eight months, and that the market pain hasn't been as severe, with average peak-to-trough declines of 29%. In the last bear market, the nation's economy didn't even enter a recession. That points to one positive in the current environment: the low unemployment rate of 4.2%. Another silver lining has been the decline in interest rates, with the 10-year Treasury yield falling from 4.8% in January to below 4.0% today. The Fed is in position to lower rates somewhat, but will want to be thoughtful in its approach in order to avoid even more market panic. Our bearish case scenario for the year called for trouble from trade wars and a deflation of tech-stock valuations, with the unemployment rate ultimately headed back toward 5.0% and the market in a correction. That's where we are now.