I talk to a lot of traders and I’ve noticed many use the words “bear market” and “recession” interchangeably. Most economic recessions cause bear markets in equities, but a bear market doesn’t have to lead to a recession. In 1987 the market crashed more then 20% but was not followed by a recession. That could happen again in 2019 but first lets look at what exactly are bear markets and recessions.
Bear Market | A decline in the stock market by 20% or more is a bear market. Anything less than 20% is just a correction.
Recession | Two consecutive quarters of negative economic growth (GDP).
Bear Market without a Recession Example
Take a look at the chart below. The S&P 500 is not far off from being down 20% and in a bear market. If the S&P does fall below 2360 the stock market will be in a bear market but GDP growth was 4.2% in the second quarter and 3.5% in the third quarter. Most economists have forecast 2019 GDP growth around 2.5% to 2.0%. While this is a slow down in growth it is still positive growth. It is very possible for the stock market to fall below 2360 (bear market) while the US economy is still growing (not a recession).
The stock market has been charging higher during periods of very strong GDP growth rates. Now that the US economic growth rate is coming back to the norm, stocks are selling off. One can make the argument that stocks went too far, too fast, and now we are seeing the consequences. When markets run up too high, they tend to come down too low also. In these types of situations you can have a temporary bear market in the stock market and not be in recession. Of the past 10 bear markets in the US stock market, only about half resulted in a recession.
Emini S&P 500
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