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S&P 500 Falls Into Bear Market Territory

·3 min read
S&P 500 Falls Into Bear Market Territory
S&P 500 Falls Into Bear Market Territory

Financial markets were in for another rough day on Thursday after policymakers failed to inspire confidence in investors. The U.S. announced a 30-day travel ban for Europe, while the European Central Bank announced 120 billion euros of additional quantitative easing for the year and looser capital requirements for banks.

The S&P 500 plunged more than 7% in early trading, triggering a Level 1 circuit breaker for a second time this week. Markets were temporarily halted for 15 minutes shortly after the open. The index finished the session down by 9.5%, its worst single-session decline since 1987 and its fifth-largest decline ever. 

Thursday's rout pushed the S&P 500 from 19% below its all-time high to nearly 27% below. The 20% level marks the dividing line between a bull and a bear market, according to many on Wall Street. 

S&P 500 Enters Bear Territory

What A Bear Market Means

While a handy heuristic, the 20% threshold doesn’t necessarily tell investors any important information about what to do and where stocks are headed from here.

The cutoff for bull market versus bear market is rather arbitrary. It just as well could have been 30% or even 40%.

Nor does crossing the threshold suggest anything about the future. It doesn’t indicate how large or how long the ultimate sell-off will be. Nevertheless, if the S&P 500 finishes the day down by more than 20%, it’s something that hasn’t happened since the financial crisis.

There have been close calls. Most recently, in December 2018, the index shed 19.8% on a closing basis before zooming back to all-time highs over the next several months.

In October 2011, during the eurozone sovereign debt crisis, the index fell as much as 19.4%; and in October 1990, in the midst of a modest recession, the S&P 500 bottomed out with a 19.9% loss.

Spooky History

It’s true that in recent history, declines in the S&P 500 that exceeded 20% on a closing basis tended to get dramatically worse. For example, we saw that during the financial crisis and after the bursting of the dot-com bubble, but that doesn’t mean it will continue to be the case.

The two most recent 20%-plus declines certainly paint a grim picture for future returns.

On July 9, 2008, the S&P 500 closed more than 20% from its all-time high as bad news during the financial crisis piled up. The index would go on to extend those declines to 56.8% over the next eight months.

Similarly, the index crossed that line in the sand on March 12, 2001, and the decline continued for another 19 months, reaching 50.8% at its nadir.

However, earlier declines suggest a more in-between scenario is possible. For example, on Feb. 22, 1982, the S&P 500 entered bear market territory. After that, losses only expanded to 27.1% over the next six months.

Then there is the August 1966 example. The S&P 500 only fell another 2% over the next month after falling into bear market territory. 

Little Solace

None of these historical examples will be much solace to investors in the short term. The magnitude and speed of the current decline is extremely unusual. And where and when markets bottom out is anyone’s guess.

The economic fallout of the coronavirus on the U.S. has yet to show up in the data. On Wednesday, the government revealed that initial jobless claims fell by 4,000, remaining near recent lows. The number of claims will surely rise as large parts of the economy shut down.

Yet, investors have little idea how bad the damage will be, leaving them guessing and panicking.

Email Sumit Roy at sroy@etf.com or follow him on Twitter @sumitroy2


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