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Another recession signal? Stock market's wild day raises fears of bear market, downturn - USA TODAY
Paul Davidson, USA TODAY
President Donald Trump’s historic tariffs have left a trail of troubling recession signals, including tumbling consumer confidence, rising business uncertainty, and a flurry of layoff announcements.
A potentially more worrisome threat emerged Monday – a bear market.
The S&P 500 index briefly entered bear market territory in mid-morning trading – defined as a drop of at least 20% from its recent market peak – before rebounding to close at 5,062, or 17.6% off its February 19 high.
Officially, then, the benchmark index is not in a bear market but stocks are highly volatile and could slip into that dreaded zone any day.
Does a bear market mean recession?
That would be noteworthy because nine of the past 14 bear markets since World War II have been followed by recessions within an average of six months, according to analyses by CFRA Research, an investment research firm, and Moody’s Analytics, an economic research company.
All four of the most recent U.S. downturns have been foreshadowed by market bears: the early 1990s slump triggered by the Federal Reserve’s high interest rates, an oil price shock and savings and loan crisis; the dotcom bust of the early 2000s; the housing crisis that sparked the Great Recession of 2007-09; and the pandemic recession of 2020, though that downturn and bear market were virtually concurrent.
By contrast, the Oct. 19,1987 market plunge known as Black Monday – caused by overvalued stocks and computerized trading - was not followed by a recession. Neither was the 2022 bear set off by the Fed’s hefty interest rate hikes to fight a pandemic-induced inflation surge.
“The stock market selloff is both a signal of a future recession but also a potential cause,” said Mark Zandi, chief economist of Moody’s Analytics.
In other words, if investors are unloading stocks, that’s a sign they’ve lost faith in the economy and thus corporate earnings. And since investors are often right, it could be a clue that the economy is headed south.
Fundamentally, the tariffs could cause a recession by sharply raising prices on imported goods and leading consumers to scale back spending, which makes up 70% of economic activity. JPMorgan Chase has raised its recession odds to 60% while other economic firms have boosted the chances to nearly 50%.
