The Relationship Between Bear Markets and Recession

December 26th, 2018 by 

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

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

'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.



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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