It usually takes a recession to bring down the stock market
Following the stocks' worst week in four years, US indexes fell over 3% by the end of the day on Monday. And then they opened sharply higher on Tuesday.
While we can't rule out the risk that markets start plunging again, history shows that the odds of that happening are quite low without certain economic conditions being met.
"[M]ajor declines in the S&P 500 - that is to say, bear markets in which prices drop by at least 20%, which is roughly twice the drop that occurred between 10th and 24th August - have only tended to occur in, and around, recessions," writes Capital Economics' John Higgins. "And we doubt very much that one of those is around the corner."
Since 1950, the US has seen 9 bear markets and 10 recessions. And almost all of these bear markets have overlapped with the economic downturns, which can be seen on the chart below.
(The one notable exception here, however, is October 1987's infamous "Black Monday" when the Dow plunged a shocking 508 points - or about 22.6%. Although stocks were in a bear market, GDP never went negative.)
In light of that, Higgins points out that the even with the recent stock plunge, the US economy is currently looking pretty good. GDP growth expected to be around 2.3% this year, and 2.8% in the next, and policymakers are (still) considering hiking rates this year.
Still, it remains to be seen what will happen with the markets this time around.
Check out this chart from Higgins. It highlights periods of US economic recession in grey and the length and depth of bear markets in purple.
