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The Relationship Between Bear Markets and Recession

December 26th, 2018 by 
PK

The odds that the economy was in a recession in Q4 2018 are zero. (Zilch. Nada.) However, at least in market lore, one of the hallmarks of bear markets is they are often associated with a recession.

To what degree? From the 11 previous bear markets we identified on the S&P 500, 7 of the 11 either preceded or followed a recession.

In this post we'll look at previous S&P 500 bear markets and examine the relationship between bear markets and recessions.

Recessions and Bear Markets in the S&P 500

For all bear markets on the S&P 500 since January 1950 (except the current) we went back and noted some characteristics of the bear and the economy.

Bear Market StartRecessionRec. StartRec. EndRec. LengthMax Drawdown
10/21/57TRUE09/01/5705/01/58241-21.47%
05/28/62FALSE----29.31%
08/29/66FALSE----23.69%
01/26/70TRUE01/01/7012/01/70333-37.27%
11/26/73TRUE12/01/7304/01/75485-49.93%
09/25/81TRUE08/01/8112/01/82486-28.01%
10/19/87FALSE----35.94%
10/11/90TRUE08/01/9004/01/91242-20.36%
09/01/98FALSE----22.45%
02/22/01TRUE04/01/0112/01/01243-50.50%
07/01/08TRUE01/01/0807/01/09546-57.69%

So in 7 out of 11 – 63.6% of S&P 500 Bear Markets – the bear preceded or followed a recession.

In 1957, 1970, 1981, 1990, and 2008 the economy was in a recession before we confirmed a S&P 500 bear market. In 1973 and 2001, interestingly, we were in a bear market on the S&P 500 before a recession started.

Gap Between Recession and Bear Market

An important thing to note about recessions is they are only declared after the fact. Using the NBER's post-dating methodology, recessions begin when there is an economic activity inflection at the top... and end at the economy's trough.

With that framework in mind, we took a look at the gap between bear market starts and recessions for the recession bears. Note that, of course, we don't know if the US will enter a recession soon. We'd need to revisit this work from some future vantage point to complete this economic history.

Bear Market StartRecession StartDays Between
10/21/5709/01/57-50
01/26/7001/01/70-25
11/26/7312/01/735
09/25/8108/01/81-55
10/11/9008/01/90-71
02/22/0104/01/0138
07/01/0801/01/08-182

'Days Between' is the calendar difference in days between the start of a bear market and the start of a recession. As you'd expect, negative numbers mean the recession started before a bear. Positive numbers are the two holdouts – 1973 and 2001 – where the bear preceded a recession.

Recessions and Bear Markets Relationship on the S&P 500

There are some interesting takeaways from this research.

In the post-WW2 era, roughly 2/3 of bear markets are associated with a recession. Usually a bear market is entered after a recession, however in a couple cases the recession came later. If your prior is 1998, the recession started about a month and a half after the bear market which would put it in February 2019... again, if you're into that comparison.

Four times since WW2, the S&P 500 was in a bear market without a corresponding recession. The worst of those bears was in 1987, where the S&P 500 declined 35.94% peak to trough. That bear was also quite a long one - we went 700 calendar days between new all time highs in the S&P 500.

Even with the monster day in the S&P 500 today (+4.96%!) we're still in a bear until we confirm a new high. See more about bear markets in the S&P 500 in our previous post.

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