Finding the Bottom in Equities

Key Takeaways

1. In the post-war period, the S&P 500 Index has experienced a bear market, on 13 occasions, with a median drawdown of 29.6%. The current drawdown of 23.6% would rank as the 10th largest during the period.
2. Based on empirical evidence, we have identified two major drivers of the magnitude of equity drawdown during recessions: equity valuations and severity of recession.
3. Current high valuations indicates that the equity drawdown could be larger than historical averages, although it is possible there might be a milder recession this cycle given healthier corporate and household balance sheets in this period, and less leverage in the financial system, which could mitigate some of the downside.
4. From a tactical perspective, we will consider adding to equity exposure on signs of capitulation, associated with panic selling, as measured by the CBOE Volatility Index (VIX), a metric that follows implied volatility of the S&P 500.