Bear market still has more pain to inflict before it bottoms, history shows

Published Thu, Oct 20 20221:28 AM EDTUpdated Tue, Nov 8 20226:57 AM EST

Data analyzed by Bespoke Investment Group shows that stocks' current bear market may need to take another leg lower before rebounding. The S & P 500 's decline over the past six months is "tame" compared to the final six months of previous market downturns, according to Bespoke's analysis of the nine prior times since 1928 that the S & P dropped more than 25% from an all-time high. That spells bad news for investors hoping the current bear market has hit a bottom, as the general rule of thumb is the final six months of a bear market before a bounce should be particularly painful. In other words, it's always darkest before the dawn – but the data indicates it isn't as dark now as it has been before. "Looking at how those returns compare to the current period shows that the magnitude of the declines over the six-, three- and one month leading up to the recent Oct. 12 low rank on the mild side," Bespoke said in a Tuesday note. The S & P 500 declined 18.7% over the six months leading up to the low last week, which is the second best performance of all the bear markets analyzed. That's a softer fall than the median decline of 26.3% among these periods – and even further from the declines seen in the six months leading up to bear markets catalyzed by the 2008 recession and the Sept. 11, 2001 terrorist attacks. 'Trying to catch a falling knife' Bespoke recommends investors hold tight amid the fluctuations. "When it comes to investing during a bear market, you'll often hear the advice that investors should wait on the sidelines until the market shows signs of meaningful stabilization," the firm said. "You can lose a hand (or your retirement) trying to catch a falling knife, so for most investors, aggressively buying into a decline is not advisable since steep losses can quickly cascade into something a lot worse. However, just as going 'all-in' when faced with a steep decline may be considered reckless, getting 'all-out' until things 'settle down' is probably just as unwise." However, Bespoke recognized the upside investors can see when they get in at the true low, noting median gains of 15.2%, 19.4% and 30.9% over the first one-, three- and six months, respectively, following the historical bottoms studied. That means the bounce-back was usually the same size or bigger than the preceding drop, according to Bespoke. But it becomes harder to gauge a bottom when the index closes near the low, which can confuse investors as to when a bottom was truly hit. The S & P 500 closed within 5% of the true low a median of 10 times during previous bear markets. If Oct. 12 was the true low, the index would have hovered around that bottom a lot more than in the past. In just the six months before Oct. 12, the S & P 500 closed within 5% on 20 trading days. Other firms have shared the sentiment that there is more pain to come. In a note to clients Monday, Barclays said equities were "not at the bottom yet." "Positioning remains cautious but investors haven't capitulated," head of U.S. equity strategy Venu Krishna said. "Investors have lightened up on risk exposure, and options data like rising call open interest and flat skew suggests that the pain trade may be to the upside." Wolfe Research said in a Monday note that the economic bubble hasn't popped yet, despite the Federal Reserve continuing to raise interest rates in a bid to temper inflation. "Unfortunately, while much of the air has come out, we see more downside ahead as the Fed now reverses course in the opposite direction" of its previous lax policy, chief investment strategist Chris Senyek said.