Typical Bear Market Recovery

The S&P 500 dropped 34% in March from 3394 to 2305, a decline of 1089 points. As of this writing, we have recovered about half of that loss to 2885. It is not uncommon to have sharp rallies follow sharp declines in a bear market. The typical initial rally is up to about two thirds of the loss. 

Historically, bear market recoveries will be W-shaped, not V-shaped. The market typically attempts to retest the low. However, this is not your typical bear market. Most bear markets are financial related. This one is health related. We essentially turned the economy off. It was strong and getting stronger before the pandemic hit.

Recessions are generically defined as two negative quarters of Gross Domestic Product (GDP) in a row. Q1 came in at negative 4.8% and Q2 is projected to be significantly worse at negative 30.8 per CNBC and Moody’s Analytics. That being said, the economy is expected to return to growth with projections of 11.5% in both Q3 and Q4.

Markets are forward-looking mechanisms, meaning multiples will start to rise long before economic data and corporate earnings cease to decline. A sign of a bottom is when the market goes up on bad news. Both of these are happening now. Stocks have historically bottomed four months prior to a recession’s end and four to six months before earnings trough.