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AAM Viewpoints – Tough Love from the Fed Awakens the Bears – What to Expect from Here

At the December Federal Open Market Committee (FOMC) meeting Fed Chairman Powell, in an admirable display of independence, looked past turbulent equity markets (and Presidential suggestions) and continued his path to neutral monetary policy. Unfortunately, the Fed’s steadfast approach awoke a few hibernating bears along the way. While bear markets will grab most of the attention, we find it helpful to remember why Chairman Powell is raising interest rates in the first place and to put the current environment into historical context.

 Straight from the source, in the December FOMC statement the Committee states:

…The labor market has continued to strengthen, and economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year….

This endorsement confirms a healthy economic backdrop for the United States; one that does not require accommodation. The message coming from the Fed since this tightening cycle began in December 2015 (when Janet Yellen was Fed Chair) is that it’s time to take the training wheels off. The blowout December jobs report, which checked all the boxes, was the latest validation of that position.

A strong economy, as described by the Fed, is usually a good indicator for equity performance. However, this time around the S&P 500 has tumbled as much as -19.78% from its all-time high back in September (9/20/2018 -12/24/2018). Intraday trading saw the benchmark breach the 20% “Bear Market” threshold, yet on a closing basis it somehow escaped the commonly used bear market definition – perhaps for good reason.

Typically, a bear market coincides with a shrinking economy (using Ned Davis Research definitions this is the case about 60% of the time). But as the Fed points out, economic activity is still strong, and while it will likely slow it is unlikely the U.S. economy will shrink over the near term. This leaves us in the less common situation of a bear market independent of a recession, or a non-recessionary bear market.  

As one might expect, non-recessionary bear markets are much different than their recessionary counterparts. To quantify it, they are about 42% shorter in terms of length and 26% less severe in terms of magnitude. The table below compares the two:

Average Length (Days)

Average Loss (%)

Non-Recession Bear Market



All Bear Markets



Recession Bear Market



 Source: Ned Davis Research

Assuming December 24, 2018 remains the near-term low, the selloff lasted 95 days – about half as long as the average non-recessionary bear, with 75% of the losses coming in the last three weeks (the S&P 500 lost 15.74% from 12/3/2018-12/24/2018). The quick and severe drawdown, particularly the wash-out at the end, rings more of a “sky is falling” event than a full-blown bear market. Either way, the divergence between good economic data and bad equity performance is unsustainable over the long term, in our opinion. Using the historical data as a baseline we expect this selloff to be short-lived and in the context of a secular uptrend. While Chairman Powell might have awoken the bears, the volatility might reawaken a Goldilocks environment of economic growth coupled with a softer Fed which has the potential to be very good for the markets going forward.


CRN: 2019-0110-7152R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit


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