S&P 500 Index price tests bear market territory after crash and raises recession concerns
A near term crash in the S&P 500 Index price has seen bear market territory tested, suggestive of an economic recession to follow.
S&P 500 crash tests bear market territory
The chart above highlights that the S&P 500 (US 500) as declined by more than 20% over the last five months.
This meets the standard definition of a technical bear market i.e. a more than 20% correction from a high. Some definitions do however suggest that a bear market needs to be a 20% correction from a recent high. ‘Recent’ being the high a couple of months or around sixty days ago.
The correction on the S&P 500 has taken longer than this, with the price taking around 5 months to reach this dubious milestone. We do still however consider the index to be in or at least testing bear market territory right now.
Does a bear market on the S&P 500 mean a recession to follow?
The below chart highlights 20% pullbacks on the S&P 500 and how these corrections/ crashes or bear markets correlate with recessions in the US since the 1970s.
Since 1972 a monthly chart of the S&P 500 shows that there have been eight bear markets (excluding current market move). The eight bear markets correlate with seven recessions. The crash of 1987 (Black Monday) is the outlier, as the markets fell by more than 35%, but there was no economic contraction to accompany the move.
It should be noted that, while there is correlation between bear markets and recessions, most of these bear markets only confirmed within their accompanying recession (as marked with black arrows).
When we look at where we are currently, the S&P 500 has fallen by over 20% and the US has reported an economic contraction for the first quarter (Q1) of 2022. Consensus forecasts do not predict an economic contraction in the US for second quarter (Q2) 2022. However, persistently high inflation begets what has been an accelerating pace of monetary tightening which is currently equating to fears that growth will be negatively impacted further forward. These concerns are being priced into markets right now.
How to trade the S&P 500
After breaking down from the range highlighted between levels 4205 and 4070, we have seen an aggressive decline to follow on the SP 500 Index. The sharp move lower is currently breaking support at 3875 and leaving a price gap from the 3900 level. The move lower suggests the failure of previously guided upside break of our dotted trend line.
A close below 3875 considers 3730 as a the next support target from the move.
The Index is looking oversold at present, although this is not considered an indication to trade against the prevailing downtrend. Instead traders might consider using a rebound from oversold territory (should it occur) to find short entry, unless gap resistance is broken with a close above the 3900 level.
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.
No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. Please see important Research Disclaimer.
Please also note that the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.
Take a position on indices
Deal on the world’s major stock indices today.
- Trade the lowest Wall Street spreads on the market
- 1-point spread on the FTSE 100 and Germany 40
- The only provider to offer 24-hour pricing
Live prices on most popular markets
- Forex
- Shares
- Indices
See more forex live prices
See more shares live prices
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.
See more indices live prices
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.