S&P 500 is hovering near the bear market. Their ferocity may depend on the economy.

Many investors are convinced that US equities are already in a bear market, even if the benchmark S&P 500 index has not yet technically confirmed it. History indicates that the ferocity of any downturn may depend on whether or not the economy avoids a recession.

That sounds obvious, but the debate over whether the economy is headed for recession is still far from settled. Much may still depend on political decisions and luck.

There are certainly reasons to be nervous. Sam Stovall, chief investment strategist at CFRA, noted in a Monday note that year-over-year increases in inflation that exceed the mean by one standard deviation or more, as is the case now, have been followed by a recession.

While that doesn’t guarantee a recession is coming, the history of bear markets during such downturns could leave investors uneasy, Stovall wrote.

CFRA

“The disturbing historical implication is that every time the year-over-year change in the headline CPI exceeded one standard deviation above the mean, the US fell into recession and the S&P 500 suffered a bear market,” he said (see chart above). ).

Watch: The chances of a market-led recession coming sooner than expected are increasing by the day, investors and traders say.

Furthermore, these bear markets ended up being deeper than those not associated with recessions, falling an average of 38% versus 28%, respectively, Stovall found. Additionally, bears with recessions lasted longer (an average of 15 months) than bears not associated with recessions (an average of six months).

A close below 3,837.25 would mark a drop of 20% or more for the S&P 500 SPX,
+0.95%
since its record finish on January 3, meeting the widely used definition of a bear market. If the S&P 500 closes below the threshold, the start of the bear market would go back to the January 3 peak.

The S&P 500 came close recently, trading as low as 3,810.32 on Friday, but avoided the downtrend by bouncing before the closing bell. The index rose on Monday, followed by a 0.8% drop on Tuesday to close at 3,941.48. Analysts and investors have argued that the market’s behavior so far in what has been a brutal 2022 has been in line with past bears.

Watch: The chances of a market-led recession coming sooner than expected are increasing by the day, investors and traders say.

The Nasdaq Composite COMP,
+1.51%
entered a bear market earlier this year, while the Dow Jones Industrial Average DJIA,
+0.60%
it’s down more than 13% from its record-breaking finish on January 4.

Stovall noted that there have been 12 bear markets since 1948 and an equal number of recessions.

And while most bear markets have generally been triggered by impending recessions, not all bear markets have been accompanied by one. There were three bear markets (1961, 1966 and 1987) that occurred independently of recessions, he said, while three US recessions (1953, 1960 and 1980) were not preceded by bear markets.

When stocks anticipated a recession by falling into a bear market, the price peaks occurred, on average, seven months before the start of the recession, while only once, in 1990, did a recession and a market peak occur together.

“It’s encouraging that while recessions lasted an average of 10 months, bear markets bottomed an average of four months before the end of the recession,” Stovall said.

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