The S&P 500 sees its third leg down more than 10%.  Here's what history shows about past bear markets hitting new lows from there, according to Bespoke.

Stocks fell sharply after the Federal Reserve said on Wednesday it was raising its benchmark interest rate by three-quarters of a percentage point as it battles inflation, with the S&P 500 continuing its decline in what Bespoke Investment Group described as its third step down.

“Where this bear market will eventually bottom is anyone’s guess, and events beyond the Fed’s control will likely play a role in where the market will ultimately end up,” Bespoke said in an emailed note on Wednesday. “In times like this, though, it’s always good to look at how the current period compares to other periods, if for no other reason than to see how bad we are or how much worse it could get.”

The S&P 500, which hit a record Jan. 3, has sunk 20.5 percent so far this year, according to FactSet data. The index fell 1.7% on Wednesday for its biggest drop since September 13, the day August inflation data was released hotter than expected.

The S&P 500 is down more than 10% from its August peak, its third decline in the current bear market, according to Bespoke, although it is still above its June low.

The firm examined past bear markets during the post-World War II period, which began at all-time highs and saw at least three legs down 10% or more before the S&P 500 eventually bottomed. They started in January 1973, November 1980, August 1987, March 2000 and October 2007, according to Bespoke.

“If there was one consistent pattern in all five of the previous periods that were highlighted, it’s that in each of them the S&P 500 made a lower bottom in its third leg lower,” Bespoke said. The S&P 500 isn’t much above its June bottom, “so either the market has more to fall,” or if the index can rally back to 4,250, “that would offer some faint hope to the bulls that the worst of the declines will is behind us.”

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The S&P 500 on Tuesday closed down 10.4% from its recent peak on Aug. 16, confirming that “the index is in the third stage of at least 10% lower during the current bear market,” Bespoke’s note showed.

“After some extreme oversold readings in mid-June, the S&P 500 was up 17.5% through mid-August, but the rally fell short” of its 200-day moving average, the firm said. That same month, Fed Chairman Jerome Powell’s clear message in his Speech of 26 Aug in Jackson Hole. Wyo., economic symposium that he will continue to fight inflation through tighter monetary policy even as it hurts businesses and households, caused a stock selloff.

The the decline deepened after a stronger-than-expected reading of August inflation based on the consumer price index, with investors questioning whether the S&P 500 will retest its bottom in June.

Past bear markets

“The bear market that started in January 1973 and lasted until October 1974 was pretty relentless,” Bespoke said. The third leg down then was particularly painful, as the S&P 500 fell more than 37% in a selloff that only accelerated in August of that year after the resignation of President Richard Nixon.

The 1980-1982 bear market was notable for “the fact that the following year’s rally more than erased all previous declines,” the note shows.

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The bear market in 1987 was just as deep but quick, spanning less than five months, Bespoke said. “This bear market was also unique in that it was the only one with at least three legs lower where every 10%+ decline did not result in a lower bottom.”

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“Outside of the COVID meltdown, 21st century bear markets are more drawn out,” according to the note.

From the peak in March 2000 to the bottom in October 2002, Bespoke reported five separate stages of at least 10% lower before the S&P 500 finally bottomed. “Most of them were severe,” according to the firm’s study.

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More recently, “the bear market that began in 2007 included five separate declines of at least 15%, with three exceeding 25%, Bespoke said. The 18.5% rally from October to November 2008 was the only bounce of more than 10% during that period when the S&P 500 hit a higher high, according to the note.

“Unfortunately for all the bulls who pounced on this positive technical development at the time, it ended up being a big hoax,” Bespoke said.

All three major U.S. stock index benchmarks ended sharply lower on Wednesday as investors digested the latest major rate hike by the Fed as it aims to tame inflation through tighter monetary policy. The blue-chip index Dow Jones Industrial Average
DJIA,
-1.70%

fell 1.7%, while the tech-heavy Nasdaq Composite
comp,
-1.79%

sank 1.8%.

Meanwhile, the S&P 500
SPX,
-1.71%

nearing its lowest in 2022. The index ended Wednesday up 3.4 percent from its lowest close this year of 3,666.77 on June 16, according to Dow Jones market data.

Read: The Fed predicts a major economic slowdown and rising unemployment as it battles inflation

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