How loud will the market roar?

The S&P 500 is down more than 20% so far this year. In June alone, stocks are off 8% with the once-beloved Energy sector coming under fire. The good news is that many commodity prices are in retreat,  which should help stem the rise in the inflation rate. What’s troubling, though, is the drop in economic growth. You don’t have to go far to find the latest murmurs and prognostications for a recession either later this year or in 2023.

What a Year 2021 Was…

Let’s take a moment for a level-set. Has the GDP growth rate cooled? Yes, and in a big way. Consider that the U.S. economy expanded at a torrid clip just last year. At +5.7%, 2021 was the biggest year for growth since 1984. The fourth quarter alone featured a whopping 6.9% GDP climb. And stocks surged. The S&P 500 rose 27% last year. Doesn’t that seem like ages ago?

…And Now a Recession Could Be on the Way

After a negative Q1 GDP print and an Atlanta Fed GDPNow estimate of 0.0% for the second quarter, we face the double-whammy of a pending economic recession and a current bear market in stocks. Many Wall Street economists still expect this quarter’s GDP growth rate to be positive. However, it might all be semantics. The economy is clearly cooling off and the Fed has turned aggressive in taming inflation. The question for investors is where do stocks go from here? Is there hope for the second half?

Open Up the History Books

A nice thing about economics and markets is that we have so much historical data available to parse through for clues. According to data from CFRA, there have been 13 bear markets since 1946 – defined as a drop of 20% or more from a daily closing price on the S&P 500 to a closing low. Often market declines fall into one of two buckets: “garden variety” or “mega-meltdown” depending on the magnitude of the bear. As you might imagine, a mega-meltdown is much steeper than the garden variety bear market. This year’s 23.6% is just a cub compared to the average 33% drawdown among all bear markets since 1946.

A Mild Recession? A Less Harsh Bear Market?

So, we might have a long way to go before reaching a bottom – you might presume. Not so fast. Among “garden variety” bear markets, backing out extreme plunges, the average dip is 27%. Maybe the S&P 500 is closer to the bottom than many Wall Street strategists give it credit for?

If the Fed’s actions and other supply side factors can help push inflation lower, the likelihood of a mild recession or economic slowdown increases. In that scenario, a shallow bear market is a possibility.

How Long Will It Last?

Something else to consider is the duration of bear markets. After all, what makes them so painful is that downtrends can last for such a long time with discouragingly frequent “dead cat bounce” rallies that fool investors into thinking the bottom is in. The 2000-02 and 2007-09 protracted bears were two such examples. The average length of garden variety bear markets has historically taken almost 11 months to reach a definitive bottom, while mega-meltdowns take more than 2 years to bottom. Considering we are 6 months into this bear market, if you believe we are headed for a mild slowdown, there is the possibility that we are more than halfway through this decline.

Big Returns After a Bottom

It’s also helpful to know that it typically takes 23 months to recoup bear market losses and make new highs in the S&P 500 (among all bear markets since 1946). That means stock returns once the bottom is made are quite strong – on the order of +42% in 12 months.

The Bottom Line

2022’s first-half performance could be the worst since 1962. Fears of a recession permeate the economy right now amid stubbornly high inflation, but the jobs market remains strong. The good news is that mild recessions typically feature less severe bear markets. If that’s the case, then the market lows, at least by historical standards, are near. That means now through the next few months could be a great time to invest for those with a time horizon going out several years.

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Lindsey Bell, Ally’s chief markets & money strategist, is an award-winning investment professional with a passion for personal finance and more than 17 years of Wall Street experience. Bell’s unique ability to connect the dots between data and real life and craft bite-sized money ideas that people can use and apply stems from her deep background as an analyst, researcher and portfolio manager at organizations including J.P. Morgan and Deutsche Bank. She is known for demonstrating why and how an understanding of all things money improves a person’s finances and overall well-being. An ongoing CNBC contributor, Bell empowers consumers and investors across all walks of life and frequently shares her insights with the Wall Street Journal, Barron’s, Kiplinger’s, Forbes and Business Insider. She also serves on the board of Better Investing, a non-profit focused on investment education.

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