US stocks are on the verge of a bear market

It's been a rough ride for the S&P 500: The index is on a six-week losing streak, has lost more than $10 trillion in market capitalization, and is on the brink of a bear market. Two indicators point to an even greater decline, which may indicate that recession is on the horizon. Let's see how to approach this whole situation.

What do technical indicators show for investing in stocks?

Despite how bad everything already looks, the S&P is still trading about 15% above its 200-week moving average, a level that has been something of a support during previous bear markets, except for the drop in the dotcoms during the years 2000-2002 and the great financial crisis during the years 2008-2009. That tells us that the index is likely to fall another 13% before encountering real resistance.

There is also a key indicator for measuring market stress, which measures how many members of the S&P 500 have recently set a new 52-week low. And it is not at the levels seen during comparable market declines. Less than 30% of S&P 500 members have done so, compared to nearly 50% during the growth scare in 2018 and 82% during the global financial crisis in 2008. A good indicator to continue perfecting our investment training.

Of course, big technology represents a considerable part of the S&P, and this sector has been greatly affected by the recent market decline. But there are all these other stocks that still have more room to fall (evidenced by the fact that only 30% of S&P members are at one-year lows) and are dragging the broader index down with them.

with a good investment training Can we predict a recession?

While most analysts believe the U.S. economy will return to its expansion plans and avoid a recession, stocks themselves become recession warning indicators when they enter a bear market. This is partly due to what they indicate about the future; Corporate profits are weaker due to the decline in economic growth and partly due to the reduction in investment accounts that this causes in consumer confidence and spending (the so-called wealth effect).

In fact, a study shows that for every dollar of increased wealth in the stock market, consumer spending, the biggest driver of the U.S. economy, rises by 3,2 cents. As you can imagine, this also works the other way around.

Is there always a bear market before a recession?

We can look back in history to see if bear markets always precede recessions, which tells us that they have not had a good investment education to try not to trip over the same stone. The S&P 500 has completed the required 20% decline that defines a bear market 14 times in the last 95 years. On 12 of those occasions, within a year, the US economy contracted for two consecutive quarters (the definition of a recession). The only two times it didn't was in 1966 and after the infamous 1987 flash crash known as “Black Monday”. On the other side of this indicator: among the 15 recessions that have taken place in the last 95 years, 12 were accompanied by a bear market. The bottom line: Bear markets and recessions often go hand in hand.

Now, if the US economy goes into recession it has obvious economic implications, and there are implications for stocks as well. It makes sense: A recession not only further dents confidence, but also leads to a big drop in consumer spending, manufacturing activity, and more, all of which accelerates the stock market sell-off. History backs it up: According to data from John Hancock Investment Management dating back to 1950, the average stock market decline in a bear market without a recession was 27,4% compared to 37,6% when a recession hit. a fall in stocks.

So is the U.S. economy headed toward a recession?​

That's the million-dollar question, because if the answer is yes, history suggests stocks still have more room to fall. If we look at all the recessions since World War II, many of them had four things in common. And most of those things are present today: a Fed rate-hiking cycle (done), an inverted yield curve (done), geopolitical tensions (done), and a bear market (in progress). One way to protect our portfolio against the possibility of a recessionary bear market is to buy put options on the stock market ETF SPDR S&P 500 ETF Trust (SPY). In this way, if we do not have good training in investment, we can try to take advantage of this situation without thinking twice.