The worst sales started in 1973, 2000 and 2007.
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With the latest 4% drop on Wednesday,
S&P 500
The index is now below its all-time high of 18% and dangerously close to a bear market, defined by a 20% fall from the top.
It is less clear where it goes from here. Nine of the 12 bear markets have lost at least 25% since World War II.
The three sales were particularly bloody. In 1973, 2000 and 2007, bear markets began a steep and prolonged decline of more than 40%. The other five times, the S&P 500 rolled very close to the market area, just like today, but never suffered a 20% loss.
For the nine markets that posted more than 25% drop, the average peak-to-trough fall was 38%. With the exception of more than 40% drop in 1973, 2000 and 2007, the average fall was only 31%. “This could explain why so many investors are aiming for a 30% decline,” Martin Roberg, an analyst at Canacord Genuity, wrote in a note on Wednesday.
Much has been said about the short-lived “relief rally” that took place after the market fell 20%. They usually last about two months before things get ugly again. If a relief rally occurs during this time, it could last until the start of the second-quarter earnings season, Roberts wrote. This will allow investors to unload some of their equity holdings for worse times.
There are exceptions to this road map. During the 1987 and 2020 flash crashes, the S&P 500 did not have a relief assembly. Stocks will lose another 10% to 15% until the current sell-off reaches its bottom in June, Roberts wrote.
Deep bear markets were even more volatile in 1973, 2000 and 2007, where the S&P 500 plunged an average of 51.4% before touching the bottom. This sale was painful and long. Since the indicator entered a bear market, it has taken an average of another 258 days before it reached True.
According to Roberts, if current sales follow this path, real market bottoms will not be reached until the second quarter of 2023. “Honestly, we suspect the card has a 50% + beer market because the short- and long-term rates are much lower today,” he wrote. “Still, this is not a 0% probability event.”
In addition to the historical documents, there are a few other reasons that can be seen.
The stock was historically expensive before the current sale. Despite the 18% drop, the S&P 500 is still trading near 18 times earnings. For the past beer market, the index did not go down until it reached 12 times earnings on average. This means that even if the company’s earnings remain stable in the coming months, stocks could fall another 30% from here before the valuation finds balance.
Also unusual: the market is down about 20% but the Federal Reserve continues to promise aggressive growth. Fed Chair Jerome Powell says the central bank is committed to controlling rising inflation, regardless of the market’s response to the rising rate.
In the past beer market, the Fed raised interest rates only once, on March 7, 1974. It didn’t end well. The S&P 500 was down 22% from its peak at the time of the rate hike; It did not go down until six months later, when it lost 48% of its value.
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