To The Moon

$S&P 500(.SPX)$ was down 20.3% from its peak since Jan this year. Last week, it fell below the 3,837, which was viewed as the boundary of the bear market. It also marked the largest decline since 2020 and the longest correction since 2016.

Technically, we entered a“bear” market. But whether it would turned into a real recession still remains to be a question for future.

Here’s the chart summarizing the length of bear markets(retracement over 20%) and recessions in history.

Data Source: Twitter @Charlie Bilello

Tiger note:

Since 1929, we have experienced 28 technical bear markets and 16 recessions,the S&P 500 has averaged 1 bear market every 4 years. What we really fear is the recession.

We call tell from the chart that 57% of the“bear markets” turned out to be recessions in history, while the remaining 43% didn’t turn into worse situations. Therefore, this indicator might be good forecasts for us. But, it was very close to the 50-50 chance generally, and wouldn't necessarily cause recessions.

Let’s continue to look at how things would go on after 20% decline in history. Here’s the chart listing forward returns of SPX in 3-month - 10 years.

Data Source: Twitter @Charlie Bilello

We can find that SPX continued to fall for 7 consecutive weeks and recorded 14% decline in streak, which ranked among the top level in history plunges.

It seems that it would return to positive growth in 9 months. But for some particular cases, it continued to fall even after one year, including 1931, 1969, 1977, 2000, and 2008. These cases were all during the recessions.

Tiger note:

Therefore, we can conclude that the none-recession“bear markets” at least recover from the 9th months since it entered the bearish territory, and most of them can recover after 3 months.

However, if it evolved to become a recession. There would be way more losses ahead as you can tell from the chart below. We have crossed the 20% level last week. Thus, this red line can be extended longer.

Let's move on to another 2 indicators that investors care most: EPS and PE in history:

Data Source: Twitter @Charlie Bilello

We can tell from the chart that the operating EPS in 2022 is the highest among all these periods, but its P/E now is lower than the half of the cases in history. At the same time, 61% turned out to be expansion after large declines. 

Tiger Note:

It implies that $S&P 500(.SPX)$now enters a bargin territory with its high EPS and low PE. In long-term, the data told us over 60% transformed to expansion and $S&P 500(.SPX)$enjoyed a positive growth overall.

In addition, the end price now is very close to the level in 2020, which means $S&P 500(.SPX)$may be close to its bottom even the stock market would retrace to the times of no loose monetary policy. 

But it should noted that we should also be prepared for the worst time because the problems we have is different from history.

Let's find out what differences the "bear markets" had:

Data Source: Twitter @Charlie Bilello

Conclusion:

That's all about our Tiger Charts today. Let's walk through our conclusions again:

1. Since 1929, we have experienced28 technical bear markets and 16 recessions. 57% of the“bear markets” turned out to be recessions in history.
2. The none-recession“bear markets” at least recover from the 9th months since it entered the bearish territory, and most of them can recover after 3 months.
3. The operating EPS in 2022 is the highest among all these periods, but its P/E now is lower than the half of the cases in history. At the same time, 61% turned out to be expansion after large declines.
4. We should also be prepared for the worst time because the problems we have is different from history.

What's your opinion towards $S&P 500(.SPX)$ 7 streak declines?

Do you think it would turn into a recession?

Share your views in the comment section