Here’s how a US recession has impacted a bear market in the past

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Recent price rallies without lasting effects
A recession follows a market that averages down 43 percent
Current P/E ratio is 50 percent pricing in recession

The stock market is currently in bear market mode for the ninth time since 1990. Statistically speaking, only every second Brenmarkt was followed by a recession in the USA.

In the past, it took an average of 14 months for the stock market to recover sustainably, calculated Charlie Bilello of Compound Advisors. As a result, the bear market could drag on until August 2023, since the S&P 500 only broke the 20 percent loss mark in June 2022.

It can be assumed that the Brenmarkt will last months rather than weeks. Nevertheless, every bear market is different, emphasizes asset manager Peter Hoppe and refers to the 2020 bear market, when the pandemic led to panic on the stock market. In hindsight, it was the shortest bear market ever recorded, lasting only 27 days, although this was not foreseeable at the time.

In the past, the MSCI World All Countries lost an average of 43 percent when a bear market turned into a recession. In the past, when the stock market did not lead to a US recession, the index lost an average of 21 percentage points.

Bottoming or Recession?

Price-to-earnings ratios (P/E) fell to an average of 13.3 during Brenmarkt periods, ie a fall of at least 20 percent below the last peak, while during periods of actual economic downturns they fell to as low as 15.5. From this it can be concluded that with a current P/E ratio of 14.4 and a price decline of 21 percent, the market has already priced in a recession by 50 percent in historical comparison, Dirk Steffen stated on June 21. in the Deutsche Bank newsletter “Perspectives in the morning”. “It has not yet been decided whether there will actually be a recession in the near future. The stock market fluctuations will definitely remain with us,” says the capital market strategist.

In his fundamental analysis “Corona Crash vs. Brenmarkt” from 23.06. Sven Weisenhaus writes that even the DAX does not show any sustained strength in the recent price recovery. He therefore continues to have doubts about a bottoming out or even trend reversal and continues to view the chart picture bearishly. The expert assesses the development of the EURO STOXX 50 in a similar way.

Falling valuation levels

The reduction in the valuation of the DAX – also in comparison to the S&P 500 – is well advanced and has reached a “normal” valuation level. An analysis by Helaba, in which the price/cash flow ratio (KCV) and the price/book value ratio (PBV) are considered in addition to the PER, shows that the DAX is already in the lower normal range, while the American broad index is only just reached the upper normal range.

The current correction has lasted for more than six months, while non-recessionary markets in the US have lasted an average of half a year. According to the Helaba experts, the risk/reward ratio is now attractive because the US stock market has already lost 24 percent since January. If the economy slips into recession, statistically speaking, this would be accompanied by further losses, totaling 38 percent on average, and extending over a period of 20 months.

How can a trend reversal be achieved?

In a report, analysts at Goldman Sachs assume that 2022 will be a cyclical market characterized by high inflation and rising interest rates. The stocks would have the streamlining monetary policy already priced in. On average, such a bear market lasts for two years and records a price decline of 31 percent, so the current bear market comes very close to the historical averages. However, the duration is estimated to be lower, CNBC quotes from the report.

However, inflation must first fall to allow for lower valuations, growth prospects and monetary easing. In the past, a trend reversal could usually be achieved with a fall in interest rate expectations. “Only when the news situation changes positively again can the mood on the stock exchanges change,” said asset manager Peter Hoppe to Die Welt. Then falling interest rates and a reversal in oil prices could lead to a short-term recovery or the end of the bear market.

Editorial office finanzen.net

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