Stocks fall into a bear market when popular indices such as the Dow Jones Industrial Average or S&P 500 fall 20% or more from previous highs. That happened this week, when the Dow closed down more than 20% Monday from a high point in January.
It’s the first bear market since the early pandemic in 2020.
One concern is that often a bear market precedes a recession.
Some wonder if we’re already there. Jeff Guernsey, Cedarville University’s assistant dean of business administration and a professor of finance, recalled that earlier this year, for the first time since 2009, U.S. gross domestic product was negative for two quarters in a row. Technically, those are the chief milestones of a recession, Guernsey said.
But we also see a very robust employment market today, even as inflation is rising, he added. You don’t usually have a recession paired with prices surging upwards, Guernsey said.
“Those two things don’t usually go together,” he said.
This bear market can be seen as a result of the recent tightening of the money supply by the Federal Reserve, Willardsen said. It’s not a coincidence that bear markets often correspond with the onset of recessions, he said.
He thinks the stock market in recent years has become too reliant on liquidity and on “the Fed just being able to print money.”
That reliance created something of a financial boom, he said. And when that boom brings about capital misallocation, inflation and rising interest rates, those events bring on the “bust,” he said.
Said Willardsen: “I think we’re at the bust part of that.”
Guernsey offered a cautionary note.
“It’s hard to think of a recession that doesn’t have bear market in the stock market, but every bear market doesn’t necessarily predict a recession,” Guernsey said.
Everyone interviewed for this story agreed there are a lot of moving parts, and stock markets are constantly shifting. At this writing early Wednesday, U.S. stock futures were mixed before rising in a volatile trading session.
Nationwide Senior Economist Ben Ayers said that if there is a downturn, there are distinct signs it may be of the modest variety.
“I certainly wouldn’t say we’re on the doorstep of a recession, but we’re moving in that direction,” he said. “I think if we were to see a downturn, the soonest we would see it would be the second half of 2023.”
Ayers pointed to some reasons for cautious optimism: Consumer and business balance sheets are in good shape. He is also seeing a still-strong demand for workers, and he is not expecting a huge runup in foreclosures and defaults.
Perhaps we’re biased toward expecting a big recession, thanks to recent history, he said.
“I feel it’s much more likely that we’re going to see a modest downturn this time around, as we see normally with the economy,” Ayers said. “Most recessions are of the more modest variety.”
Guernsey agrees that a recession may not be particularly strong.
“It could be kind of shallow, and we just muddle along,” he said, adding with a laugh. “I do reserve the right to be wrong, that’s for sure.”
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