Many clients are inquiring about the stock market and specifically asking, “Is this the bottom?”
While the answer to that question is largely unknown, we do have some data that illustrates the behavior of the stock market during times of economic stress / recessions.
Firstly, the stock market is widely considered as a Leading Indicator, which means it will react ahead of the U.S. economy. I’m a big fan of charts so I’ve included a brief graphic of stock market behavior ahead of recessions below.
Please note, any references to the "stock market" in this blog, refer to the Standard and Poor's 500 Index (S&P 500).
Past performance is no indication of future results. Indexes are unmanaged. It is not possible to invest directly in an index.
The data above suggests that the average lead time of the market across all 10 bear markets since 1950 has been 7.9 months. It is important to note that a Bear Market is usually defined as a drop of about 20% from highs. The S&P 500 was at a high on February 19, 2020 and hit the 20% drop on March 11, 2020. That all being said, and given the extreme nature of this economic shutdown, I wouldn’t be surprised if we are officially in a Recession much sooner than 7.9 months. I suppose now we know when the Bear Market began, and how that relates to the U.S. economy.
While April had been a pretty good month for stocks, another chart suggests that we are still in for a bumpy ride. The graphic below simply compares a chart of the S&P 500 back in 2008 to the current situation. The days are listed on the bottom X-axis, and we can see that there are a number of positive blips in the midst of a larger downtrend that finally reversed meaningfully 6 months later.
Sources: Bloomberg and Wells Fargo Investment Institute, as of March 24, 2020. The S&P 500 Index is a market-capitalization-weighted index considered representative of the U.S. stock market. For illustrative purposes only. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
The future is unclear, but perhaps now we can see a little of the forest from the trees.
Thanks for reading!!