A bear market occurs when there is a 20% or more continuous fall in the stock market from peak levels.
With central banks around the world raising interest rates in response to very high inflation, investors are already worried about recession risks. The sharp sell-off in the equity markets in the run up to and following these announcements has intensified fears of a hard economic landing.
Schroders’ Fong says that in the past, economic downturns have typically been triggered by the tightening in monetary policy. This has been observed since the 1900s, where the US economy has only managed to avoid a recession 30% of the time when a bear market has occurred.
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Image: Schroders
“While we’re not currently forecasting a recession in the US, the risks are skewed towards one,” says Fong.
“Investors can take some comfort that recessions don’t necessarily follow a bear market,” she adds. “That said, the odds are not favourable looking back at history.”
Looking ahead, Fong says that the longer the sell-off lasts for and the deeper the fall in prices, particularly against a backdrop where the Fed is hiking interest rate, the higher the risk a recession remains on the cards.
