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There are good and bad times to be an investor. As major indexes such as the SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust (NASDAQ:QQQ) sink from all-time highs, you might hear traders say that the market is entering a “bear market.“
But what does that mean? And how is it different from a recession?
Bull, Bear Markets: You’ll often hear investors referring to “bull markets” and “bear markets.” Bull markets refer to long, protracted periods of growth over several years. At these times, investors are generally optimistic about the prospects of their investments.
The bull market from March 2009 to February 2020 was an extended period of economic growth following the Great Recession and before the COVID-19 pandemic. The S&P 500 appreciated by over 350% during this time.
In contrast, bear markets are marked by volatile, fear-induced sell-offs that can last anywhere from a couple of months to a few years. Investors are pessimistic about the market at this time. The general rule is that a 20% drawdown from recent highs indicates a bear market while a 10% decline defines a “correction.”
As of Monday, the S&P 500 is down nearly 8% from all-time highs; the Nasdaq index is down nearly 13%. Neither index is currently in bear market territory but the Nasdaq has experienced a correction.
A bear market often coincides with a weak economy and investor fear but does not necessarily mean the economy is in a recession.
Recessions: There are many ways to determine if an economy is in a recession, but the most common method is rather simple. When an economy experiences two consecutive quarters of GDP decline, economists generally define the economy as being in a recession.
According to the U.S. Bureau of Economic Analysis, GDP rose by 1.4% in 2024’s first quarter and 2.8% in the second quarter. Therefore, the economy is not currently in a recession.
What’s Going On?: If the U.S. is not in a recession but investors are becoming increasingly bearish, what is going on?
A weak July jobs report, released on Aug. 2, showed unemployment rapidly increasing. The report, along with other soft unemployment numbers, created concern within the financial markets about the state of the U.S. labor market.
In response, Goldman Sachs increased its 12-month U.S. recession odds by 10 percentage points to 25%. Goldman held the probability at upwards of 30% during periods of 2022 and 2023 before lowering to 15% in late 2023.
Many investors are worried that the Federal Reserve did not act soon enough in cutting interest rates from elevated levels. While the Fed will likely cut rates in September, observers worry that it will be “too little, too late” — not soon enough to stop a recession.
Monday’s price action has also been driven by meltdowns in the Asian markets and fears of geopolitical escalation in the Middle East. Specifically, Monday’s price action was attributed to the technical “yen carry trade.”
To Sum Up: While the market is bordering on bearish, it is not necessarily in a recession — yet.
According to Hartford Funds, since 1928, there have been 27 bear markets but only 15 recessions. While bear markets often go hand in hand with a poor economy, market performance doesn't necessarily mean a recession is imminent.
While bears seemed certain that a recession would come in 2022 or 2023, no such event occurred. Time will tell whether today’s market pessimism is another blip on the horizon or indicative of something larger.
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