Stocks fell sharply after the Federal Reserve announced on Wednesday that it had raised its benchmark rate by three-quarters of a percentage point while battling inflation, with the S&P 500 Index continuing its slide that Bespoke Investment Group described as its third decline.
“Where this bear market ultimately lies is anyone’s guess, and events outside the Fed’s control will likely play a role in where the market finally ends,” Bespoke said in an emailed note on Wednesday. “At times like these, though, it is always a good idea to consider how the current period compares to others, if for no other reason than to see how bad we are going or how much worse it could get.”
The S&P 500, which hit a record high on January 3, is down 20.5% so far this year, according to FactSet data. The index fell 1.7 percent on Wednesday, posting its biggest drop since September 13, the day inflation data for August was released Hotter than expected.
The S&P 500 is down more than 10% from its August high, the third such drop in the current bear market, according to Bespoke, although it is still above its June low.
The company studied previous bear markets during the post-World War II period that started at all-time highs and saw at least a three-legged decline of 10% or more before the S&P 500 finally bottomed. It began in January 1973, November 1980, August 1987, March 2000 and October 2007, according to Bespoke.
“If there’s one consistent pattern over all the previous five periods illustrated, it’s that in each one, the S&P 500 scored a low, low on its third lower leg,” Bespoke said. The S&P 500 hasn’t been much above its June low, “so either the market will drop further,” or if the index manages to rally back to 4250, “it will provide some faint hope for the bulls that the worst of the declines will be.” We are behind them.”
The S&P 500 closed Tuesday 10.4% down from its August 16 high, confirming that “the index is in the third phase at least 10% lower during the current bear market,” a detailed note shows.
“After some severe oversold readings in mid-June, the S&P 500 rose 17.5% through mid-August, but the rally failed a bit” from its 200-day moving average, the company said. In the same month, Federal Reserve Chairman Jerome Powell’s clear message in his letter August 26 speech In Jackson Hole. Wyo. , an economic seminar that he will continue to combat inflation by tightening monetary policy even while causing pain to businesses and households, Excitement of selling in stocks.
The The recession deepened After a stronger-than-expected reading of August inflation based on CPI, with investors wondering whether the S&P 500 will retest its June low.
Previous bear markets
“The bear market that started in January 1973 and extended through October 1974 was pretty severe,” Bespoke said. The third leg at the time was particularly painful, as the S&P 500 plunged more than 37% in a sell-off that only accelerated in August of that year after President Richard Nixon’s resignation.
The note showed that the bear market from 1980 to 1982 was notable for “the fact that the rally in the year after more than erasing all previous declines”.
Bespoke said the 1987 bear market was deep but rapid and lasted no more than five months. “This bear market was also unique in that it is the only market with at least three lower legs where not every drop results in 10% + lower lower.”
According to the note, “Far from the COVID crash, bear markets in the 21st century have been more elongated.”
From a peak in March 2000 to a low in October 2002, the Bespoke program accumulated five separate legs that were at least 10% lower before the S&P 500 finally bottomed. “Most of them were severe,” according to the company’s research.
More recently, “the bear market that began in 2007 included five separate declines of at least 15%, three of which crossed 25%,” Bespoke. The 18.5% rally from October to November 2008 was the only retracement of more than 10 % during that period when the S&P 500 hit an all-time high, according to the note.
“Unfortunately for any bulls who pounced on this positive technical development at the time, it ended up being a major fake,” Beasbock said.
All three major US stock indexes ended sharply lower on Wednesday, as investors digested the latest major interest rate hike from the Federal Reserve as it aims to tame inflation through monetary tightening. Dow Jones Industrial Average DJIA,
down 1.7%, while the tech-heavy Nasdaq Composite,
Meanwhile, the S&P 500 SPX,
It is nearing its lowest level in 2022. The index finished up 3.4% on Wednesday from this year’s closing low of 3,666.77 on June 16, according to market data from Dow Jones.