Bernstein Quants Say $7.6 Trillion US Bear Market Has More to Go

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(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.

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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.

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“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.

Read More: Bear Market Risk Rises With Consumer Prices Outpacing GDP Growth

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.

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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

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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.