“I am an optimist because I don’t see the point in being anything else.” Abraham Lincoln

With all the talk about a pending recession and stocks in a bear market, today, I wanted to share some more thoughts and stats on recessions and bear markets.

First things first, we do not currently anticipate a recession in 2023, which is quite opposite of the general consensus. You can read more about that here and here.

What exactly is a bear market? For the definition of a bear market, we are using the traditional definition, which is an index down 20% or more from the recent peak. Yes, there isn’t much difference between 19.8% and 20.0%, so we will also include some near bear markets as well, but when we say bear market, that is what we mean.

First, do all bear markets take place in a recession? Turns out they don’t, as stocks, indeed can have a bear market without a recession. The worst ever was the 34% bear during the Crash of 1987, which all took place without a recession.

Second, taking things a step further, here we broke down the performance based on if the bear market took place in a recession or not. Take note; we did include some ‘near bear markets’ this time to get more instances. Plus, a near bear feels like a bear market if you are in it. What still amazes us about the table below is that the average bear market without a recession was 24%, and this recent bear was 25%. Assuming we avoid a recession and October was indeed low, this was right on the bullseye.

Now take another look at the table above. The last few bear markets recovered quite quickly. In fact, the last three bear markets that didn’t have a recession recovered in four, four, and three months. Something to think about here, as stocks are two months off the October lows.

Third, this has been making the rounds lately and has been adding to some of the worries. Looking at all the bear markets that took place around a recession, not once did the bear market end before the recession started. In other words, if we are indeed headed for a recession in 2023, this could suggest that new lows may also be quite likely. Incredibly, bears don’t end for another nine months on average after the recession started, before they find their ultimate low. Again, we don’t see a recession, so this wouldn’t be the case now, but the data is quite compelling.

Fourth, the month of October tends to be a bear-market killer. Most bears have met their end during the month of October, more than any other month.

Below, we break down those previous 17 bear (or near bear) markets. The bottom line six of them ended in October, and we think there’s a very good chance number seven just happened.

Fifth and lastly, if October was indeed the bear market low, be open to the idea of higher prices over the coming two years. While not a predictor of future behavior, history shows the markets were up more than 40% a year off of the bear-market lows and up almost 60% two years off of them. During uncertain and volatile situations (like the ones that markets have treated us to in 2022), it can be hard to imagine a positive path forward, and all we see are the obstacles. Stepping back a bit can be a helpful reminder of the resiliency of the markets over the long term.

Dr. Seuss said, “Sometimes the questions are complicated, and the answers are simple.” To me, bear markets can be confusing and complicated, but the answer has always been that they indeed do eventually end, and historically better times will come when they do.

Be sure to listen to our latest Facts vs. Fiction podcast with Sonu and me. This week was a good one, as we welcomed Kathy Kriskey from Invesco to chat about commodities.

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