Shares fell sharply after the Federal Reserve announced Wednesday it was raising its benchmark interest rate by three-quarters of a percentage point in its battle against inflation, with the S&P 500 continuing a decline described by Bespoke Investment Group as the third leg down.
“Where this bear market eventually bottoms out is a mystery, and events beyond the Fed’s control are likely to play a role in where the market ultimately ends up,” Bespoke said in a note emailed Wednesday. “However, in times like these, it’s always nice to see how the current period compares to other periods, if only to see how bad we have it or how much worse it could get.”
The S&P 500, which hit a record high on Jan. 3, is down 20.5% so far this year, according to data from FactSet. The index fell 1.7% on Wednesday for the biggest drop since September 13, the day inflation data for August came in hotter than expected.
The S&P 500 is down more than 10% from its August high, the third such leg in the current bear market, according to Bespoke, although it is still above the June low.
The company studied previous bear markets during the post-World War II period that began at record highs and saw at least three legs of 10% or more decline before the S&P 500 finally bottomed out. According to Bespoke, they started in January 1973, November 1980, August 1987, March 2000 and October 2007.
“If there was one consistent pattern across all five previous periods highlighted, it is that in each period, the S&P 500 made a lower low in its third leg lower,” Bespoke said. The S&P 500 is not far above the June low, “so either the market must fall further,” or if the index can climb back to 4,250, “it would offer the bulls some faint hope that the worst of the declines are behind us.” are. us.”
The S&P 500 closed 10.4% lower on Tuesday than its recent high on August 16, confirming that “the index is at least 10% lower during the current bear market in its third leg,” the Bespoke note shows.
“After some extreme oversold readings in mid-June, the S&P 500 rose 17.5% to mid-August, but the rally just barely failed” from its 200-day moving average, the company said. That same month, Fed Chair Jerome Powell gave a clear message in his August 26 address at the Jackson Hole. Wyo., economic symposium that he would continue to fight inflation through tighter monetary policy, even if it hurt companies and households and caused a stock sell-off.
The slump deepened after a stronger-than-expected reading of inflation in August based on the consumer price index, with investors wondering whether the S&P 500 will retest its June low.
Past bear markets
“The bear market that started in January 1973 and stretched through October 1974 was pretty brutal,” Bespoke said. The third leg lower was particularly painful then, as the S&P 500 fell more than 37% in a sell-off that only accelerated in August of that year after President Richard Nixon stepped down.
The 1980-82 bear market was notable for “the rally in the following year more than wiped out all previous declines,” the note says.
The 1987 bear market was equally deep, but fast, spanning less than five months, Bespoke said. “This bear market was also unique in that it is the only one with at least three feet lower where every 10%+ drop did not result in a lower low.”
“Beyond the COVID crash, 21st century bear markets are more drawn out,” the note said.
From its March 2000 peak through October 2002, Bespoke had five separate legs that were at least 10% lower before the S&P 500 finally bottomed out. “Most were serious,” the company’s investigation said.
More recently, the bear market that began in 2007 has included five separate declines of at least 15%, with three of more than 25%, Bespoke said. The 18.5% rally from October to November 2008 was the only gain of more than 10% during the period when the S&P 500 peaked, according to the note.
“Unfortunately for all the bulls that jumped on that positive technical development at the time, it turned out to be a big fake,” Bespoke said.
All three major US stock benchmarks ended sharply lower on Wednesday as investors digested the Fed’s latest major rate hike as it seeks to tame inflation through tighter monetary policy. The blue chip Dow Jones Industrial Average DJIA,
fell 1.7%, while tech-heavy Nasdaq Composite COMP,
Meanwhile, the S&P 500 SPX,
is approaching a 2022 low. The index finished 3.4% higher on Wednesday than this year’s low of 3,666.77 on June 16, according to Dow Jones Market Data.
Read: Fed predicts major economic slowdown and rising unemployment as it battles inflation