Nowhere to Hide

Russia's invasion of Ukraine, skyrocketing inflation, and concerns over the upcoming actions of the Fed have led to a 20% decline in the S&P 500, ushering in the first bear market since the onset of the pandemic. (A bear market is typically defined as a 20% decline from the S&P 500's latest peak, which occurred on January 3, 2022, at 4797.) So what can investors expect? The record is not pretty. Bear markets do not tend to be short, with an average duration of 16 months for the past six downturns. The average peak-to-trough decline in those bear markets has been 38%; that would drop the S&P 500 to 2974. From a technical standpoint, we see support for the index near 3,500, which is the 200-week moving average and represents a 50% retracement of the bull market's gains. On the fundamentals, the current market P/E ratio of 16x forward earnings is not far from the historical market average, but there are questions about the durability of earnings. The historical average dividend yield for the S&P 500 is 1.9%. If stock prices were to fall to that level, the S&P 500 would settle around 3150. The worst bear market in the past six decades occurred during the Great Recession, when stocks dropped 57%. That kind of move would take the S&P 500 down to 2060. Few can predict precisely when stock prices will bottom, but we suspect investors will take their cues from Federal Reserve activity and inflation reports.