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Stock Market Correction or Bear Market?

Time will tell, but we think we’re in a correction, here's why.


Over the last 100+ or so years the average large stock market correction has taken 4-5 months and pulled back from the market high by 20-25%. Over the same period the average bear market has taken 18-24 months and fallen more than 35%, but numerous times has created losses of more than 50%.


We rarely enter a bear market without going into recession, but the stock market has always turned down before the recession starts. Over the last 60 years the time from a stock market top to a recession is usually within 6 months and we are around 5 months (5 months for the S&P and DOW, and 6 months for the NASDAQ and Russell 2000).


Yet, there are few signs of a recession on the near to intermediate term horizon. The Chicago Fed National Activity Index measures business/economic activity. Prior to a recession that index normally shows an average of 6 months deterioration and usually is negative prior to a recession. The Chicago Fed index has been stable to slightly rising for the last 13 months and shows no signs of deterioration.


Furthermore, if you look at the Chart 1, we’ve never had the S&P 500 turn negative BEFORE the Chicago Fed National Activity Index began its deterioration and it be anything other than a stock market correction.



Add to the Chicago Index the Job Openings and Labor Turnover Survey (JOLTS), a national report of job openings still above 11 million, twice the level of available workers, and it is difficult to see a recession hitting the US this year without some sort of other ‘event’ occurring. While we did have negative GDP in Q1, that was due mainly to Covid induced factors that have faded in Q2, and the Chicago Index did not even turn down, let alone turn negative.


If that is the case, that we are not on the cusp of recession, then we are likely in a stock market correction, not a bear market, and we have about hit the ‘average’ correction at this point. If that analysis is wrong, the next 1-2 months should tell us so.


But STAGFLATION you say? Ok, let us look at the period from 1973-1982. We see that the same holds true for the Chicago Index and the S&P relationship during the period for each bear market and recession, all were signaled by the Chicago Index.


We also can look at basic asset class return over the period in relation to CPI (Table below):

1. Bonds underperformed the CPI over the period – this makes sense as inflation is rising so are interest rates and therefore the capital value of bonds are decreasing.


2. Cash kept up with CPI but the Fed Funds rate and Money Market funds started from a considerably high base than today.


3. Real Estate (your house) kept pace with and slightly exceeded inflation over the period, which makes sense.


4. The US Stock Market ‘outperformed’ CPI over the period, even with three recessions and four years of negative returns.


Notice that we started the 1973-1982 stagflation period going into a recession with the drop in the Chicago Index prior to the turn in the S&P 500 in mid 1972 that was also present in 1977 and 1981, which is historically consistent, but is not present in this current stock market downturn.




What does this all mean? We think we are completing a stock market correction (hopefully), there is not currently a recession likely in 2022 and probably longer, and even if we have a period of stagflation, allocation of at least some of your portfolio to stocks is likely the best way to preserve your capital over the longer period. *


Regardless, time will tell, this could be the first time that stocks ‘lead’ us into a recession without a prior turn in the Chicago Index, and we should know that in the next couple of months.


*This is not investment advice. It is simply a look at indicators at various points in history and how they might pertain to today.


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