The tech-heavy Nasdaq officially entered a bear market on Friday, significantly influenced by Wall Street’s growing concerns about the potential economic repercussions stemming from President Donald Trump’s recent tariff rollout. As stock prices plummeted and both consumer and corporate confidence waned, financial analysts raised alarms about the possibility of the American economy slipping into a recession, which could potentially spark a global economic slowdown.
Despite some positive indicators within the economy — such as the jobs report released on Friday showcasing a labor market expansion of 228,000 jobs in March — pervasive expectations of impending financial hardship are prevalent. This dissonance between job growth and market sentiment highlights the complexities of the current economic landscape.
“The stock market is declining in anticipation of fairly obvious negative consequences,” remarks Jed Ellerbroek, a portfolio manager at Argent Capital Management. “Trump has implemented numerous policies that will likely decelerate economic growth.” While the recent market downturn does not definitively predict an incoming recession, he acknowledges that “the likelihood has significantly increased over the past couple of months.”
Even if Trump’s tariffs are enacted with less intensity than initially presented, some degree of economic damage has likely already occurred, warns Keith Buchanan, senior portfolio manager at Globalt Investments. The anticipation of uncertainty in the market leads to volatility, causing prices to drop across various asset classes. “The less we know about what lies ahead… that uncertainty creates the perfect storm for a market selloff,” he elaborates.
The American Association of Individual Investors conducted a weekly survey revealing a notable surge in bearish sentiment, with a 10 percentage point increase within just a week. Approximately 62% of respondents in the latest survey expressed a pessimistic outlook for the next six months, marking the most negative sentiment recorded over the past year.
While both bear markets and recessions are challenging scenarios, it is crucial to understand the significant differences between the two when considering the potential impacts of Trump’s trade policy on personal finances.
Understanding the Dynamics of a Bear Market
A bear market is typically characterized by a decline in investment prices of at least 20% from their most recent high. For instance, the Nasdaq index closed approximately 22% lower than its peak in December. Such declines can create a ripple effect across various sectors, influencing investor psychology and market movements.
Examining the broader S&P 500, there have been 11 documented bear markets since 1942, with an average duration of 11 months and an average cumulative loss of about 32%. While these figures may seem daunting, it’s essential to recognize that the recovery phases following bear markets often yield substantial gains. Investment professionals advocate for maintaining investments during these periods to capitalize on buying opportunities that arise as market conditions improve.
“The stock market typically reaches its lowest point during a recessionary phase and often experiences significant growth once the market recognizes that a turnaround is imminent,” Ellerbroek explains.
Investment strategies are inherently based on expectations of future earnings; thus, a bear market signifies an expectation that company sales and profits will decline. “Investors are forward-thinking, and the stock market tends to react to potential recession indicators approximately six months in advance,” notes Sam Stovall, chief investment strategist at CFRA Research.
However, it’s important to note that not all bear markets are followed by recessions. Investment experts caution against overly relying on bear markets as predictive indicators for economic downturns. “The stock market does not always accurately predict a recession,” Stovall adds.
Defining a Recession: Key Characteristics
A recession is conventionally defined as a period lasting at least six months during which quarterly gross domestic product (GDP) figures indicate a contraction rather than growth. The National Bureau of Economic Research (NBER) is the sole authority authorized to officially declare a recession, which often occurs well after the recession has already begun or even concluded.
Since 1950, the economy has experienced 11 recessions, averaging 11 months in length. The most prolonged recession, known as the Great Recession, lasted from December 2007 to June 2009. Although this period may seem relatively brief compared to a long-term retirement investment strategy, the lingering effects of recessions can persist long after the economy has rebounded, impacting both corporate operations and consumer behavior.
When recessions occur following bear markets, their effects typically endure even after stock prices begin to recover from their lowest points.
Comparing the Severity of Bear Markets and Recessions
While navigating through either bear markets or recessions is challenging for investors and the general public alike, economic experts assert that one scenario is categorically worse than the other.
“A recession is substantially more detrimental than a bear market,” states Mitchell Goldberg, president of ClientFirst Strategy. “Experiencing a decline in stock value can be distressing, but the real concern arises from potential job loss, as your employment is your most valuable asset.”
Moreover, the broader implications of recessions can leave lasting scars on the economy long after the initial downturn has subsided.
“From a human perspective, a recession creates widespread consequences,” Buchanan explains. “Its impacts can be lasting — sometimes even cultural.” Individuals who retain their jobs may still alter their spending habits, adopting more frugal behaviors in anticipation of potential job losses.
With consumer spending accounting for approximately 70% of the economy, the prevailing sense of worry and fear can translate into tangible economic effects, according to Emily Bowersock Hill, CEO and founding partner of Bowersock Capital Partners. “While sentiment surveys do not always directly affect demand, this time, I believe they will,” she cautioned in a research note released on Friday.
The same situation applies to businesses, Goldberg asserts. “Companies tend to emerge from recessions more streamlined and efficient. This reality impacts everyone receiving a paycheck,” as businesses may choose not to rehire all the workers they laid off or may create lower-paying jobs.
Although witnessing a decline in your 401(k) can be alarming, Stovall encourages retirement savers to maintain a long-term perspective. “You haven’t actually lost anything unless you’ve sold your investments,” he states, emphasizing the importance of avoiding panic selling that locks in losses. “The first step is to shield your portfolio from emotional reactions.”
On average, it takes about 18 months for the market to recover to its breakeven point following a bearish selloff. However, signs of recovery often only become clear in hindsight, Buchanan notes. “The stock market typically bottoms when the outlook appears bleakest,” he adds. “Recession is often not fully behind us when markets hit their lowest points; it can feel as though the worst is still ahead.”
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