100 Years of History Shows Sell-Off Only Half Over

100 Years of History Shows Sell-Off Only Half Over

  • Jon Wolfenbarger says the stock market sell-off will likely last into mid-2023.
  • Wolfenbarger has company in his bearish views with names like Ray Dalio and Jeremy Grantham.
  • Wolfenbarger has been warning of a significant drop since last year.

Jon Wolfenbarger thinks stock-market investors are still too optimistic that a bear market bottom is coming sometime in the immediate-to-near future.

A simple look at history would tell them otherwise, says Wolfenbarger, the founder of Bull And Bear Profits who’s been working in financial markets for three decades and who has been warning of a significant drop in stocks since last year.

In a recent commentary to clients, Wolfenbarger looked at the track record of the length of bear markets over the last century when heading into a recession. With the current bear market just over nine months in — the S&P 500 peaked on January 3 this year — the poor outlook for stocks will likely drag on for months, he said.

Here’s how long recessionary bear markets since the 1920s have lasted, from the month they started:

  • September 1929: 33 months
  • September 1932: 5 months
  • March 1937: 12 months
  • June 1948: 12 months
  • August 1956: 14 months
  • December 1968: 17 months
  • January 1973: 21 months
  • November 1980: 22 months
  • July 1990: 3 months
  • March 2000: 31 months
  • October 2007: 17 months
  • February 2020: 1 month

The average length of those 11 bear markets is over 15 months. But when valuation is considered, things change.

When bear markets occur when valuations are relatively high, the bear markets tend to drag on longer. The median bear market length during periods of high valuation among those listed above is 17 months, Wolfenbarger said, compared to 13 months when valuations are attractive. (He did not account for the 2020 bear market — which began with high valuations — because of the unprecedented fiscal and monetary stimulus that brought stocks back into bull market territory.)

Given that the current market sell-off began amid some of the highest valuations in history, Wolfenbarger said he expects the bear market to last 17 months or longer. In a commentary at the end of October, he said he expects the S&P 500 to fall by at least 37% peak-to-trough, but that it’s probable the market falls further.

Of course, Wolfenbarger’s call relies heavily on a recession playing out, which hasn’t happened yet, according to the National Bureau of Economic Research, which makes official recession designations.

In another commentary this month, Wolfenbarger laid out why he’s confident that a recession is coming. One reason is that the yield curve has inverted, and that has preceded every recession since the 1950s. Yield curve inversions are when yields of shorter-duration bonds rise above those of a longer-duration. The durations most commonly used are the 2-year and 10-year notes.

Inversions, which signal that investors are souring on the economy’s near-term prospects, are shown on the chart below when the line dips below the 0% threshold. Recessions are marked in gray.

yield curve

Federal Reserve Bank of St. Louis



Some other indicators that tell Wolfenbarger a recession is ahead include:

loan request

Federal Reserve Bank of St. Louis



  • Banks tightening their lending standards

lending standards

Federal Reserve Bank of St. Louis



  • And The Conference Board’s Leading Economic Index, which combines the performance of 10 indicators

leading economic index

The Conference Board



For stocks to hit a long-term bottom, Wolfenbarger said three things likely have to occur.

One is that the Fed has to stop raising interest rates. That appears unlikely in the immediate future, as the central bank appears likely to hike rates into 2023, and has said their aim is to bring real interest rates into positive territory.

Another is that a recession usually needs to be “going on for a while” or be finished.

And finally, he said investor sentiment needs to become more bearish. According to sentiment indicators like Bank of America’s Bull and Bear Indicator, sentiment is already extremely bearish, but Wolfenbarger thinks it can get worse.

bull and bear indicator

Bank of America



“When investors are chasing stocks this aggressively on the hope that the Fed may stop raising rates a few months earlier in 2023, that suggests investor sentiment is not bearish enough to mark a bottom in this bear market,” said Wolfenbarger, who is also a former securities analyst at Allianz Global Investors and investment banker at JPMorgan and Merrill Lynch.

Wolfenbarger’s views in context

In June, Societe Generale conducted a similar analysis to Wolfenbarger’s and looked at bear markets over the last 150 years.

They found that the market recovered much faster and rose much higher after 2020’s bear market (thanks to stimulus) compared to prior market crashes, and said that they expect the S&P 500 to fall to 3,200 to fall in line with historical return patters. The S&P 500 has fallen as low as 3,577 this year, and sat near 3,959 on Friday.

valuation trends after a bear market

Societe Generale



“Our analysis shows that, to be consistent with the historical post-crisis market valuation trendline, the cumulative returns as of today, since the March 2020 bottom, should be about 35%, that is an S&P 500 level of 3020, which implies a total drawdown from the January 2022 top of about 37%, indicating a further sell-off of about 15% to reach a new market bottom,” said Solomon Tadesse, the bank’s chief US equity strategist, in the June note.

He added: “The S&P has surged by 113% over the past two years from its market bottom of 2237.50 on 23 March 2020, reflecting the unprecedented asset bubble induced by, among other things, excessive liquidity from the monetary and fiscal policies of the time .”

On Thursday, Bank of America’s Chief Global Equity Strategist Michael Hartnett said he expects stocks to perform poorly in the first half of 2023, but will likely begin to rebound in the second half of the year after the Fed pivots to dovish policy. That’s in line with Wolfenbarger’s expectations.

“We say bonds H1’23, stocks H2’23,” Hartnett said in a note to clients.

A number of other big name investors — including Guggenheim Partners’ Scott Minerd, Crossmark Global Investments’ Bob Doll, Interactive Brokers’ Thomas Peterffy, Bridgewater’s Ray Dalio, Duquesne Family Office’s Stanley Druckenmiller, and GMO’s Jeremy Grantham — have also urged patience in the months ahead with the Fed still hiking rates and the economy slowing.

As Wolfenbarger said, a Fed pivot is a likely requirement for a bottom, and a pivot is dependent on what the Consumer Price Index shows in the months ahead. Stocks rallied furiously after October’s CPI reading was lower than expected, and that could happen again if November’s reading shows more meaningful progress on inflation reduction.

But if inflation proves to be stickier than investors like in the months ahead — and if the economy continues to show signs of breaking in the meantime — stocks could be ripe for further downside.

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