It makes sense to be cautious right now, since there are so many downside risks. We think central banks will probably “jam on the brakes” to regain control of inflation. This would prove particularly challenging for risk assets.
We believe risk assets are likely to face stiff headwinds near-term and can be expected to decline further should recession fears become reality. In other words, despite the poor performance this year, the market does not appear to be priced for a recession – yet. One explanation for this is that there remains a possibility a recession can be narrowly avoided, and markets could then begin to recover later this year.
History suggests bear market rallies are frequent but fleeting in the face of economic challenges. Indeed, most bear markets throughout history are associated with recessions. Yet, there are some grounds for optimism. Analyzing the S&P 500 performance in every bear market since 1929, in 70% of instances going back to the Great Depression, the S&P records a positive return in the next year after entering a bear market,1 according to the Global Economics and Investment Analysis team.
1 1-year forward price return from the date the S&P 500 first closed more than 20% below the prior peak
The BNY Mellon Investment Management Global Economics & Investment Analysis (GEIA) Team
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