Below is a chart and brief excerpt from today's Early Look written by Senior Macro analyst Darius Dale.
Now that we’ve established earnings have a decent way to go down from here, one set of statistics I find especially troubling for the “bottom is in” narrative for the equity market is that market participants typically observe a substantial degree of deterioration during recessionary bear markets en route to the ultimate trough date in the S&P 500 itself.
Specifically, as the Chart of the Day details, all but one of the seven postwar recessionary bear markets have seen double-digit declines in S&P 500 TTM EPS from their respective cycle peaks to their respective bear market trough dates. The median inclusive of the paltry 1973-74 episode is -15%. We’re only tracking at -5% though yesterday for the peak-to-present decline in S&P 500 TTM EPS associated with the current recessionary bear market, which, technically, doesn’t count if you’re in the camp that the trough in the SPY is already in.
What’s interesting about the two most recent recessionary bear markets is that the “E” actually bottomed months in advance of the “P” (e.g. on 4/1/02 vs. 10/9/02 and 12/31/08 vs. 3/9/09). Let us not forget that corporate leverage ratios tends to rise substantially during recessions as well amid EBITDA deflation. Perhaps that provides a helpful clue to risk managing the current dynamic…