The last three trading days on Wall Street can be defined as a bloodbath. measure S&P500 Lost 3.9% in a day and completed a fall of more than 21% since the all-time high set in January this year, and almost all stocks on the US stock exchanges were painted red. This is the second time this year that the US Technology Index has enteredBear Market” (Bear market).
Glossary
Bear Market: A decrease of 20% from the last peak
Bull market: 20% increase since last recession
Bear trap: One of the characteristics of the bear market – a situation in which the markets climb, as a kind of rebound for the sharp declines, but the rises do not necessarily indicate a change in the trend and the markets may fall further
Since bear market status is considered a 20% drop in the index – officially the two leading US stock indices (NASDAQ and S&P 500) entered the bear market this week, with the Dow Jones index also approaching (a drop of 17% compared to the peak). This also ended the “bull market” that began after the Corona crisis.
“Bear market is not necessarily a recession”
It has to be said that a 20% drop from the peak has no meaning other than to be symbolic – a quick rule of thumb designed to separate a bull market from a bear market. However, the bear market has significance in its broader context – the fact that it has historically been a sign most of the time entering a recession.
In retrospect, declines in markets at a rate of 20% from the peak did indeed precede a recession, as did the 2001 crisis and the financial crisis in 2007 and 2008.
The LPL Financial market strategist quoted on MarketWatch explains that it has been common to point to the existence of 17 bear market events, or almost bear, since World War II. These events lasted on average about a year. At the same time, there has been great variation in the length and depth of bear market events in the past. The steepest fall, from a low to a low of almost 57%, occurred in the 17 months that accompanied the 2007-2009 financial crisis.
The longest bear market lasted for almost 21 months in the years 1973-1974, during which there was a decrease of about 48% from the peak. (If you go even further back in history, you can mention an even longer bear market that is 62 months old, between 1937-1946). The shortest bear market event is also the closest – a 34% drop with the outbreak of the corona plague between February and March 2020. The bear market was then characterized by a recession, but the stock market subsequently corrected by about 115% to a high.
According to Sergei Vaschonok, a senior strategist at Oppenheimer Investment House: “The overarching conclusion is that a bear market will not necessarily bring a recession, but a recession will always be experienced in a bear market.”
Vashchonok adds that “sometimes a exit from a recession does not mean that the bear market is over, as it was in the US in 2002 after the dot.com crisis. The recession began in 2001 and the real economy emerged from the recession in 2002. In 2008 we were in a bear market, the stock market crashed, but then – as now – opinions were divided as to whether there was a recession or not. All readings of GDP data in 2008 were positive, but were subsequently updated below. “
The fight against inflation: waiting for the interest rate decision
The direction in which the markets will move forward will be determined mainly according to e-policyFederal ReserveThe US Federal Reserve, in its fight against inflation. A first hint could be obtained tonight, when the Federal Reserve will update the interest rate.
As you may recall, the US Federal Reserve tended to think that inflation, which rose after the corona crisis, was part of the same difficulty in reading data by weighting temporary disruptions caused by the corona. Fed Chairman Jerome Powell estimated that inflation would fall further, until last November. In November 2022, the Fed realized that inflation was not temporary, and as of last May the rate of rise in the index had reached a peak of 41 years (8.6%).
Changing the Fed’s policy by 180 degrees and the decision to raise interest rates raises the possibility that the Fed is delaying the train. Instead of controlling inflation, he was forced to pursue it in order to curb the path of interest rate hikes, which are expected to weigh heavily on the U.S. economy due to rapid change.
Jerome Powell, Chairman of the Federal Reserve / Photo: Associated Press, Patrick Semansky
The Fed now faces a dilemma: on the one hand, the desire to cool or curb rampant inflation; And on the other hand – to avoid the market entering a recession.
Since the publication of US inflation data over the weekend, which indicated a rate of price increases of 8.6% at an annual rate, the probabilities of raising interest rates in the US by 0.75% this coming Wednesday have risen to about 85%. If the Fed does choose such an increase rate, then it is the highest interest rate increase for three decades.
In light of the situation, why should the Fed not raise interest rates at once by 1%? It should be mentioned that priorities have changed, and the Fed is now focused on curbing inflation and less on the labor market as in the past or on the stock market as speculators tend to think, but interest rate hikes should be at a pace that will curb inflation but not lead to recession.
Declines in markets under the auspices of the zigzag of the Fed
After the crisis in the real economy that was silenced due to the corona, here came the crisis of the asset bubble but is still not defined as a financial crisis characterized by insolvency and credit crunch. Just as the exit from the real crisis was initiated by the Fed, the entry into the current crisis is also initiated by the Fed, which seeks to land the US economy gently and curb inflation.
But it’s not so sure it would work for him. Therefore, it is no wonder that markets are declining sharply.
The declines in the markets this time are attributed not to an unexpected event that could not have been expected, but to a change in the monetary policy of the world’s important central bank. In fact, both the bear market and the bull market have a common denominator: the actions of the US Fed.
The Fed’s policy shifted from an expansion after the subprime crisis with the interest rate cut aimed at stimulating economic activity by lowering interest rates to zero (which led to loans and leverage at unprecedented levels), towards an ultra-expansion in the corona crisis to help the real economy and markets. Today with the aim of curbing inflation.
The reduction in the expansionary policy, which includes raising interest rates and reducing the aid provided to markets, raises fears of a continuing recession.
Will an energy crisis land another blow to the markets?
In days of sharp declines in the markets the attempt to time the market is akin to a shot in the dark. Still, a famous investor statement says that once the news of the falls on Wall Street reaches the mainstream television news – it’s time to go on a shopping spree to seize opportunities. Not sure this is the situation right now in the markets.
The interest rate hikes and the reduction in aid provided by the Fed to the financial markets increase the financing costs of companies, and may lead to a recession and an increase in unemployment. As for the financial markets, the reduction of the Fed’s balance sheet, which means that the Fed does not repurchase bonds and in fact does not pump up supply in the market – has dropped their price and boosted bond yields. When the bond market offers a return of over 3%, the shock in the stock markets makes the investment relatively attractive in the past.
Still, if you want to find a bright spot – the market tends to estimate that inflation will moderate in the coming months, since to continue to climb price increases should be as high as they have been in recent months. It can be assumed that price increases will moderate, either because of the Fed’s measures or whether the recession that will come will lead to a tightening of the belt and a fall in prices.
And yet, even this point of light to put under the vague reality ahead of the cold winter in Europe. Inflation is fueled by rising energy prices as a result of the war in Ukraine. Towards the coming winter in Europe a significant energy crisis may develop due to the boycott of Russian gas – in what could land another blow to the markets.