{"id":33004,"date":"2016-02-06T11:29:16","date_gmt":"2016-02-06T19:29:16","guid":{"rendered":"http:\/\/drduru.com\/onetwentytwo\/?p=33004"},"modified":"2016-02-06T11:29:16","modified_gmt":"2016-02-06T19:29:16","slug":"the-weak-relationship-between-bear-markets-and-recessions","status":"publish","type":"post","link":"https:\/\/drduru.com\/onetwentytwo\/2016\/02\/06\/the-weak-relationship-between-bear-markets-and-recessions\/","title":{"rendered":"The Weak Relationship Between Bear Markets and Recessions"},"content":{"rendered":"

The February 4, 2016 edition of Nightly Business Report included a segment<\/a> assessing the ability of the stock market to predict recessions. This is of course a timely piece given the stock market’s current plunge<\/a> and growing recession fears arising from analyst commentary and softening economic data.<\/p>\n

Steve Liesman, chief economist for CNBC, took a crack at this age-old question<\/a>. He used S&P 500 (SPY) price data going back to 1945, the post-war era. He overlayed these data with the timing of bear markets. This periods covers 13 bear markets and 11 recessions. A bear market occurs after the S&P 500 loses 20% from its last all-time high.<\/p>\n


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\"A<\/a>
A timeline of bear markets juxtaposed with the timing of recessions.<\/figcaption><\/figure>
\nSource: NBR<\/a><\/strong>
\n<\/center><\/p>\n

Liesman counted a successful prediction if the bear market occurred within one year ahead of the recession, with some wiggle room for a few days. This definition created a 53% historical fraction of bear markets preceding a recession (7 out of 13 bear markets were followed by a recession). I am purposely not using the term “predict” as Liesman does because the sample is so small. Moreover, Liesman does not consider the false negative: 4 of the 13 recessions were not preceded by bear markets. Regardless, 53% is nothing to write home about; it is not an actionable likelihood.<\/p>\n

The link between bear markets and recessions interests traders and investors differently than economists. In so many cases, a bear market is well underway or even almost over by the time an official recession occurs. Moreover, we do not know a recession has officially occurred until at least two quarters after the start. This makes a recession a time for traders to consider closing out shorts and a time for long-term investors to count their pennies and load up on cheap stocks. Traders and investors are much more interested in the precursors of bear markets than recessions.<\/p>\n

The S&P 500 is currently down 12% from its last all-time high set on May 21, 2015. A bear market would take the index back to around 1704, a level last seen October, 2013. Given the on-going destruction in commodity-related stocks and now a swath of growth stocks, such an extended sell-off should create a whole host of stocks too cheap to ignore. The all-time high set in the last bull market was around 1575. A retest of that support would mark a 26% decline from this bull market’s all-time high. I consider both 1704 and 1575 in play if the S&P 500 fails to hold its intraday low from the last oversold period<\/a>.<\/p>\n


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\"The<\/a>
The edge of danger: The S&P 500 (SPY) prints its second lowest close since the most recent bottom.<\/figcaption><\/figure>
\nSource: FreeStockCharts.com<\/a><\/strong>
\n<\/center><\/p>\n


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