How long will stocks stay in bear market territory? That depends on whether the US falls into recession, Wells Fargo strategists noted last week.
The logic is simple. Recessionary bear markets are much more painful than non-recessionary bear markets. Historically, non-recessionary bears have lasted about six months, whereas bear markets that occurred during recessions were more than three times as long (on average, about 20 months).
That may sound grim, given increased talk of a 2023 recession. However, not all recessions are equal, says Morgan Stanley’s Lisa Shallett. Specifically, credit-driven recessions are much more painful than inflation-driven recessions.
Corporate profits tanked 57 per cent during the global financial crisis and by 32 per cent during the dotcom crash. In contrast, during the inflation-driven recessions of 1982-83 and 1973-74, S&P 500 profits fell 14 and 15 per cent, respectively.
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Morgan Stanley has been one of the more bearish voices on Wall Street this year, but it says other factors – strong corporate balance sheets, positive labour market dynamics, more durable corporate revenues – also point to a less severe recession. Stocks may have further room to fall, but a bloodbath looks unlikely, with strong economic fundamentals likely to “provide ballast in the event of a recession”.
