Weekly Market Digest: A Bear Market Isn’t The Same as a Recession

If it was not already assumed, it has now been confirmed there will be NO Santa Rally this year with only one abbreviated trading day left to go before the holiday. The market instead flaunted its ugly red Christmas sweater while the Fed took away the punchbowl. The Nasdaq and international stocks officially entered bear market territory both dropping over the 20% threshold from their high, while the S&P500 is nearing bear market territory and is down 7% just this week alone! Investors rotated into the more defensive sectors of the market like utilities and continued to sell the risk-on areas like technology. Global growth slowdown concerns are the underlying theme, but volatility picked up around the Federal Reserve’s rate hike decision and the uncertainty over a government shutdown looming with a deadline of midnight tonight. Lawmakers are scrambling to try and avert a shutdown by passing a spending bill that must be approved by both the House and the Senate and signed by President Trump. If there is one thing markets do not like, it is uncertainty, which continues to put downward pressure on prices in 2018.

Weekly Returns

S&P 500: 2,417 (-7.05%)
FTSE All-World ex-US (VEU): (-3.47%)
US 10 Year Treasury Yield: 2.79% (-.10%)
Gold: $1,256 (1.41%)
EUR/USD: 1.136 (0.45%)

Major Events

  • Monday – Criminal charges were filed against Goldman Sachs by Malaysian authorities over the 1MDB state investment fund, multibillion-dollar corruption scandal.
  • Tuesday – The sentencing of Michael Flynn for lying to the FBI about the Russian interference investigation was delayed unexpectedly.
  • Tuesday – The Trump Foundation announced plans to dissolve in the face of allegations over fund misuse.
  • Wednesday – The Fed raised the benchmark rate for a fourth time this year to 2.5% and signaled a raise to 3% over two hikes in 2019.
  • Thursday – U.S. Defense Secretary James Mattis resigned after an announcement came out of Trump’s plan to withdrawal U.S. troops from Syria.
  • Thursday – The House passed a $5 Billion stopgap funding bill with a vote of 217 to 185, increasing the likelihood of a government shutdown with the Senate likely to reject it.
  • Friday – Without an agreement reached, the potential government shutdown loomed over stocks which had their worst week since 2011.

Our Take

From our perspective, the market is attempting to factor in the odds of a meaningful slowdown in global economic growth. Recessions do not announce their pre-arrival, and they usually are not confirmed until we are well into one. Still, most economic data points remain solid. In the U.S., low unemployment, profits near all-time highs, and moderate inflation all point to a stable economy.

Be wary of the media’s intentional attention-grabbing headlines that cause worry and play on your emotions. You have likely seen many this week trying to call the next recession and sensationalizing the term “bear market”. Although this correction in U.S. stocks is nearing bear market territory, this is not the same thing as an economic recession. To clarify, an economic recession is typically defined as two consecutive quarters of declines in quarterly real (inflation adjusted) gross domestic product (GDP). The point is, you can have a market correction or even a bear market without an economic recession — they are not synonymous. A bear market without a recession tends to be shallower in nature compared to a bear with a recession which tends to be more severe. Per LPL Research and FactSet, the average drop in all bear markets going back to 1946 was 31%, with a recession was 37% and without a recession was 24%. What is even more interesting is that it was a 50/50 split, seven bears without a recession and seven with a recession, out of the fourteen defined bear markets over this period.

Both bear markets and economic recessions are inevitable and very hard to predict, so focus on what you can control and don’t get caught up in the sensationalism. This appears to be a healthy correction that has let some of the air out of an inflated market after a long accommodative period. Despite all the noise of the government shutdown, it is unlikely to have a material economic impact. There will always be noise, but the best thing you can do for yourself is stay the course by sticking to your financial plan that gets you to your long-term goals.

We wish you a safe and happy holiday from everyone at Personal Capital. And to those of you that had bad beats in last week’s outlier of fantasy football scoring and are now battling out a 3rd place consolation matchup, good luck this weekend!

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The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

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