(Bloomberg) — US stocks are nursing losses of $7.6 trillion this year, but if history is any guide, they’re likely in for even more declines before the bear market is over, according to Sanford C. Bernstein quantitative strategists.
An analysis of the 15 major routs since 1937 shows peak-to-trough price drops averaged 28%, deeper than the current drawdown of 20%, the team led by analyst Ann Larson wrote in a note on Sept. 13. The average bear market lasted seven-to-eight months and included three rallies with returns of 9% and lasting about 22 days on average — in line with this year, they said.
“We believe this bear market has more room to run because most major global synchronized selloffs have ended with a moderate inflation/low growth regime, and we are not there yet,” Larson said.
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Global stocks have been roiled this year, with the S&P 500 Index slumping into a bear market in June as scorching inflation and hawkish central banks raised the specter of a recession. Sentiment took a further blow on Tuesday after a hotter-than-expected US consumer price report dashed any hopes that the Federal Reserve would slow the pace of rate hikes.
The technology-heavy Nasdaq 100 sank 5.5% in its biggest one-day drop since March 2020, with some market participants now bracing for an even bigger-than-expected rate increase in September. Tech stocks are particularly vulnerable to higher interest rates as they mean a bigger discount for the present value of future profits, hurting growth stocks with the highest valuations, while boosting cheaper, so-called value shares.
The latest inflation data, as well as recent hawkish signals from the central bank, “likely indicate that a Fed pivot is off the table anytime soon, making markets more vulnerable to rate hikes and growth concerns,” Larson said.
Read More: ‘It’s a Reality Check’: Wall Street Reacts to Inflation Data
The Bernstein team is more optimistic about the longer-term outlook for stocks. If inflation is indeed near or at a peak, that has historically led to positive returns for the S&P 500 Index over a 12-month horizon, they said, adding that bleak consumer sentiment is also seen as a buying opportunity one year out.
Still, the strategists warned that a recession could “complicate” any bear market recovery, saying that since 1955, the S&P 500 has fallen by 13% when US leading economic indicators pointed to a recession, “as they are today.”
In Europe, too, an uncertain inflation outlook and the energy crisis mean it’s “too early to prepare for the final recovery,” the team said.