Stocks fell sharply after the Federal Reserve announced on Wednesday it would raise interest rates by three-quarters of a percentage point to fight inflation, with the S&P 500 continuing what Bespoke Investment Group described as its third downward move.
“Where this bear market ultimately bottoms is unclear, and events beyond the Fed’s control will likely play a role in where the market ultimately ends up,” Bespoke said in a note emailed Wednesday was sent. “However, at times like these, it’s always nice to see how the current period compares to other periods, if for no other reason than to see how bad we are or how much worse it can get.”
The S&P 500, which hit a record high on Jan. 3, is down 20.5% so far this year, according to FactSet data. The index fell 1.7% on Wednesday, the biggest drop since September 13, the day when August inflation data came out hotter-than-expected.
The S&P 500 is down more than 10% from its August high, its third downtrend in the current bear market according to Bespoke, although it is still above its June low.
The firm studied past bear markets during the post-WWII era that started at all-time highs and saw at least three price moves of 10% or more before the S&P 500 finally bottomed. These began in January 1973, November 1980, August 1987, March 2000 and October 2007, according to Bespoke.
“If there was a consistent pattern across all five prior periods highlighted, it was that the S&P 500 marked a lower low in each of its third leg,” Bespoke said. The S&P 500 isn’t far above its June low, “so the market either needs to keep falling,” or if the index can rally back to 4,250, “it would give the bulls a faint hope that the worst of the drop is behind us.” .”
The S&P 500 closed down 10.4% on Tuesday from its recent high of Aug. 16, confirming that “the index is at least 10% lower during the current bear market in its third phase,” the tailored note shows.
“After some extremely oversold readings in mid-June, the S&P 500 was up 17.5% through mid-August, but the rally narrowly missed” its 200-day moving average, the company said. In the same month, Fed Chair Jerome Powell’s clear message in his Aug. 26 Jackson Hole speech. Wyo., Economic Symposium that even as it hurts businesses and households and triggers a sell-off in stocks, he would continue to fight inflation through tighter monetary policy.
The slump deepened after a stronger-than-expected reading of August CPI inflation, with investors questioning whether the S&P 500 will retest its June low.
Past bear markets
“The bear market that started in January 1973 and lasted through October 1974 was pretty unrelenting,” Bespoke said. The third leg down was particularly painful, as the S&P 500 plunged more than 37% in a sell-off that only accelerated in August of this year after President Richard Nixon’s resignation.
The 1980-1982 bear market was notable for “the fact that the rally the year after more than erased all previous declines,” as the note points out.
The 1987 bear market was equally deep but rapid, spanning less than five months, Bespoke said. “This bear market was also unique in that it’s the only one with at least three legs down where every 10%+ drop didn’t lead to a lower low.”
“Outside of the COVID crash, 21st century bear markets have dragged on,” the note said.
From the March 2000 high to the October 2002 low, Bespoke recorded five separate periods that were at least 10% lower before the S&P 500 finally bottomed. “Most of them were serious,” 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 exceeded 25%,” Bespoke said. The 18.5% rally from October to November 2008 was the only rebound of more than 10% during that period, as the S&P 500 made a higher high, the release said.
“Unfortunately, for all the bulls who jumped on this positive technical development at the time, it became a major fake,” Bespoke said.
All three major US stock benchmarks ended sharply lower on Wednesday as investors digested the Fed’s recent large rate hike aimed at taming inflation through tighter monetary policy. The blue-chip Dow Jones Industrial Average DJIA,
fell 1.7% while the tech-heavy Nasdaq Composite COMP,
Meanwhile, the S&P 500 SPX,
is nearing its 2022 bottom. The index closed up 3.4% on Wednesday from this year’s closing low of 3,666.77 on June 16, according to Dow Jones Market Data.
Read: The Fed is forecasting a sharp economic slowdown and rising unemployment as it fights inflation