The S&P 500 sees its third leg down by more than 10%. Here’s what the story shows about past bear markets hitting new lows from there, according to Bespoke.

Shares fell sharply after the Federal Reserve announced Wednesday that it was raising its benchmark rate by three-quarters of a percentage point as it battles inflation, with the S&P 500 continuing a slide described by Bespoke Investment Group as its third leg. down.

“Where this bear market will eventually hit its low is anyone can guess, and events beyond the Fed’s control will likely play a role where the market ends,” Bespoke said in an emailed note Wednesday. “At times like this, though, it’s always nice to watch how the current period compares to other periods, if only to see how severe it is or how much it can get worse.”

The S&P 500, which hit a record high on Jan.24, has dropped 20.5% so far this year, according to FactSet data. The index fell 1.7% on Wednesday for the largest decline since September. On the 13th, the day the inflation data released for August was warmer than expected.

The S&P 500 is down more than 10% from its August high, its third leg 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 period that started at all-time highs and saw at least three legs down 10% or more before the S&P 500 eventually hit a low. Those started in January 1973, November 1980, August 1987, March 2000, and October 2007, according to Bespoke.

“If there was a consistent pattern in all five of the previous periods highlighted, it is that in each of them the S&P 500 scored a lower low in its third lower leg,” Bespoke said. The S&P 500 is not much above its June low, “so either the market has to drop further,” or if the index can move back to 4,250, “it would offer some faint hope to the bulls that the worst of the downside would be behind us. “

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The S&P 500 closed down 10.4% on Tuesday from its recent high in August. 16, confirming that “the index is in the third leg lower by at least 10% during the current bear market,” shows the Bespoke note.

“After some extreme oversold readings in mid-June, the S&P 500 was up 17.5% through mid-August, but the rally just failed” of its 200-day moving average, the company said. That same month, Fed Chairman Jerome Powell’s clear message in his August 2016. 26 Jackson Hole speech. Wyo., An economic symposium that would continue to fight inflation through a more restrictive monetary policy even if it caused pain to businesses and families, triggering a sell-off of shares.

The crisis has deepened after a stronger-than-expected reading on August inflation based on the CPI, with investors wondering if the S&P 500 will test its June low again.

Past bearish markets

“The bear market that started in January 1973 and lasted until October 1974 was pretty relentless,” said Bespoke. The lower third leg was particularly painful, as the S&P 500 fell more than 37% in a sell-off that only accelerated in August of the same year following the resignation of President Richard Nixon.

The bear market of 1980-82 was noteworthy for “the fact that the following year’s rally more than erased all previous declines,” the note shows.

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The 1987 bear market was just as deep, but swift, lasting less than five months, Bespoke said. “This bear market was also unique in that it is the only one with at least three lower legs where any drop of 10% or more does not translate into a lower low.”

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“Outside of the COVID crash, 21st century bear markets have been more pulled out,” according to the note.

From its March 2000 peak to its October 2002 low, Bespoke recorded five separate legs that were at least 10% lower before the S&P 500 finally hit the low. “Most of them were serious,” according to the company’s research.

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More recently, “the bear market that began in 2007 included five separate declines of at least 15%, with three exceeding 25%,” said Bespoke. The 18.5% rally from October to November 2008 was the only rebound of more than 10% during that period when the S&P 500 hit a higher high, according to the note.

“Unfortunately for all the bulls who jumped on that positive technical development at the time, it ended up being a big fake,” said Bespoke.

All three major US equity benchmarks closed sharply lower on Wednesday as investors digested the Fed’s latest large rate hike as it aims to tame inflation through tighter monetary policy. The blue chip Dow Jones Industrial Average DJIA,
-1.70%
fell 1.7%, while the high-tech Nasdaq Composite COMP
-1.79%
it sank by 1.8%.

Meanwhile, the S&P 500 SPX,
-1.71%
is approaching 2022. The index closed Wednesday up 3.4% from this year’s closing low of 3,666.77 on June 16, according to market data from Dow Jones.

Laws: The Fed expects a sharp economic slowdown and rising unemployment as it fights inflation

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