Barron's: A Recession Can Cause a Bear Market, but Stocks Don't Need One to Get Hit - Hard

October 24, 2019

Article by Ben Levisohn in Barron's

A recession is the only thing that can cause a bear market, right? Not quite.

Yes, we hear all the time that a recession is the only thing that can cause a bear market, but that’s not true. Bernstein’s Philipp Carlsson-Szlezak notes that bear markets and recessions usually go together, but not always. In fact, one-third of bear markets occur without a recession. Perhaps even more surprising: One-third of recessions don’t cause bear markets.

We’re all familiar with the recessionary bear market—think 2001 or 2008. The market falls, the recession arrives, and the stock market stinks for a while. But a bear market didn’t occur in 1990, when a minor recession hit the U.S. economy, while one certainly did happen without a recession in 1987.

So what’s most likely for the current market? Unfortunately not a recession without a bear market. Carlsson-Szlezak notes that what made such a feat possible in 1990 was the stock market’s relatively low valuation coming out of the 1980s, and the fact that the recession was very mild. “This scenario is less likely today—not only because valuations are higher, but also because of the extremes of modern volatility patterns points to the latter example, a bear market without a recession,” he writes.

He points to December 2018 as an example of just that “modern volatility regime,” where calm can turn to storm in an instant. “That adds to the probability of the next recession to play out in bear territory,” Carlsson-Szlezak writes. “However, non-recessionary bear markets are structurally more likely today, again driven by the modern volatility regime.”

To read this article in Barron's in its entirety, click here.

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