S&P 500 sees its third leg down more than 10%.  Here’s what history shows about past bear markets making new lows from there, according to Bespoke.

S&P 500 sees its third leg down more than 10%. Here’s what history shows about past bear markets making new lows from there, according to Bespoke.

Stocks fell sharply after the Federal Reserve announced on Wednesday it was raising its benchmark rate by three-quarters of a percentage point as it battles inflation, while the S&P 500 continued a slide Bespoke Investment Group described as the third step down.

“Where this market ultimately heads is anyone’s guess, and events outside the Fed’s control are likely to play a role in where the market ends,” Bespoke said in a note posted on on Wednesday. “In times like this, though, it’s always nice to see how the current period compares to other periods, if for no other reason than to see how bad we have it or how as bad as it could be.”

The S&P 500, which hit an all-time high on Jan. 3, is down 20.5% so far this year, according to FactSet data. The index fell 1.7% on Wednesday for the biggest drop since September 13, the day inflation data released for August came out warmer than expected.

The S&P 500 is down more than 10% from its August high, the third such leg down in the current bear market, according to Bespoke, although it remains above its June low.

The firm studied past bear markets during the post-World War II period that began at all-time highs and saw at least three legs down of 10% or more before the S&P 500 buns at last. These were started in January 1973, November 1980, August 1987, March 2000 and October 2007, according to Bespoke.

“If there was one consistent pattern within the previous five periods that stood out, it’s that the S&P 500 made a lower low in its third leg lower,” Bespoke said. The S&P 500 is not much above the June low, “so the market is going to fall more,” or if the index can get back to 4,250, “it would give bulls faint hope that the worst of the reductions would be behind him. us.”

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The S&P 500 on Tuesday closed down 10.4% from its recent high on August 16, confirming that “the index is in its third leg lower by at least 10% during the current bear market,” the order note.

“After some oversold readings in mid-June, the S&P 500 rallied 17.5% through mid-August, but the rally ended just shy” of its 200-day moving average, the firm said. That same month, Fed Chairman Jerome Powell sent a clear message in his August 26 speech at Jackson Hole. Wyo., economic symposium that he would continue to fight inflation through tighter monetary policy even as it caused pain for businesses and households, prompting a sell-off in stocks.

The slump deepened after a stronger-than-expected reading of August inflation based on the consumer price index, with investors questioning whether the S&P 500 will retest its June low.

Bear markets in the past

“The bear market that started in January 1973 and lasted until October 1974 was pretty relentless,” Bespoke said. The third leg lower was particularly painful, as the S&P 500 fell more than 37% in a selloff that only accelerated in August of that year after President Richard Nixon resigned.

The 1980-82 bear market was notable because “the rally in the year after wiped out all previous declines by more than all previous declines,” the note points out.

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The 1987 bear market was so deep, but so quick, that it lasted less than five months, Bespoke said. “This bear market was also unique in that it is the only one with at least three lower legs where each 10%+ decline did not result in a lower low.”

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“Outside of the COVID crash, the bear markets of the 21st century are more attractive,” according to the note.

From the March 2000 peak to the October 2002 low, there were five distinct mandated highs that were at least 10% lower before the S&P 500 finally bottomed. “Most of them were tough,” according to the firm’s research.

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Later, “the bear market that began in 2007 included five separate declines of at least 15%, with three of more than 25%, Bespoke said. The 18.5% rally from October to November 2008 was the only bounce of more than 10% during that period when the S&P 500 made a higher high, according to the note.

“Unfortunately, for any bulls who were affected by that positive technical development at the time, it was a big sight,” Bespoke said.

All three major US stock benchmarks ended sharply lower on Wednesday, as investors digested the Fed’s latest major rate hike aimed at taming inflation through tighter monetary policy. The blue chip Dow Jones Industrial Average DJIA,
-1.70%
fell 1.7%, and the technology-heavy Nasdaq Composite COMP,
-1.79%
to sink 1.8%.

Meanwhile, the S&P 500 SPX,
-1.71%
approaching its 2022 trough. The index ended Wednesday up 3.4% from its low close this year of 3,666.77 on June 16, according to Dow Jones Market Data.

Read: The Fed predicts a major slowdown in the economy and rising unemployment as it grapples with inflation

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