The onset of the most recent bear market this 2022 has been a worrying season for many, particularly when the S&P 500 plunged into bear territory in the week of June 13, notes Tina Fong, strategist at Schroders in a June 23 report.
Moreover, the Fed raised interest rates by a further 75 basis points (bps) on June 16, which is the biggest move since 1994. The increase in rates led a round of hikes from central banks around the world as the Swiss National Bank hiked their rates by five bps and the Bank of England by a further 25 bps.
A bear market occurs when there is a 20% or more continuous fall in the stock market from peak levels.
With central banks around the world raising interest rates in response to very high inflation, investors are already worried about recession risks. The sharp sell-off in the equity markets in the run up to and following these announcements has intensified fears of a hard economic landing.
Schroders’ Fong says that in the past, economic downturns have typically been triggered by the tightening in monetary policy. This has been observed since the 1900s, where the US economy has only managed to avoid a recession 30% of the time when a bear market has occurred.
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Image: Schroders
“While we’re not currently forecasting a recession in the US, the risks are skewed towards one,” says Fong.
“Investors can take some comfort that recessions don’t necessarily follow a bear market,” she adds. “That said, the odds are not favourable looking back at history.”
Looking ahead, Fong says that the longer the sell-off lasts for and the deeper the fall in prices, particularly against a backdrop where the Fed is hiking interest rate, the higher the risk a recession remains on the cards.
