Need to Know

BNP Paribas studied 100 years of market

crashes — here’s what it says is coming next
Last Updated: Dec. 8, 2022 at 3:19 a.m. ET
First Published: Dec. 7, 2022 at 6:36 a.m. ET

By Steve Goldstein Follow

Critical information for the U.S. trading day

What typically happens during a market crash? GETTY IMAGES/ISTOCKPHOTO

SPX +0.75% VIX +1.44% XLU +0.65%

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Oops. Stocks fell through a key support on Tuesday and it looks like some recent
momentum has now petered out. The new line in the sand for the S&P 500 SPX, +0.75%
seems to be 3,900. Whether Santa eventually comes or not is still to be determined, with
Mr. Claus perhaps postponing a decision until next Tuesday’s CPI release.
Mr. Claus perhaps postponing a decision until next Tuesday’s CPI release.

But what’s clear is that the U.S. stock market is still in a bear market. And with that in mind,
equity strategists at BNP Paribas mined 100 years of crashes to try to determine what’s
next.

Strategists led by Greg Boutle, head of U.S. equity and derivatives strategy, are expecting a
capitulation event next year. “This would be a departure from the current bear market
regime, which has been characterized by a grind lower in equities as P/E multiples have
contracted,” they say.

The most recent crash — the COVID-19 slump of March 2020 — is a bad template in their
view, as it was driven both by the extreme nature of economic shutdowns and rapid
monetary and fiscal responses. Nor do they expect 2008 to be the model, as they see U.S.
GDP contracting about 1% next year, and earnings per share slipping 1.5%.

However, 2002 is quite representative of recessionary crashes. That bear market was more
than two years in length, with a drawdown of 50%, and a 29 percentage point peak-to-
trough move in the VIX VIX, +1.44%. A typical recession bear market is 1.5 years in length,
with a median drawdown of 38% and a median peak in the VIX of 40.5.

“If we apply those averages to the market today, it implies a trough in the middle of next
year, the S&P bottoming close to 3,000, and with the VIX in the low 40s,” they say.

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The bull market that ended last year was similar to that of the 1990s, with high retail
participation, massive P/E multiple price expansion and many of the top performers
unprofitable. The S&P 500 troughed in 2002 with a price-to-equity ratio of 14. BNP’s 2024
EPS forecast of $231 implies 3,250 for the S&P 500 if the P-to-E multiple falls to 14.

In
a

neat bit of analysis, BNP recreated the VIX VIX, +1.44%, which CBOE introduced in 1993,
to cover the last 100 years. Usually, volatility peaks at or before the market trough.

“We consider a capitulation as a move associated with a sense of panic that involves a
rebasing of expectations, analysts aggressively cutting forecasts, volatility spiking and a
repricing of tails. Over the last 100 years, the capitulations in volatility have on average
come at the same time as the trough in the market,” they say.
What they do like in such a market? One idea is to find companies that have maintained
stock buybacks through a slowdown. Another is to look at companies with earnings
momentum, though the only sector identified with positive momentum in a related chart is
utilities XLU, +0.65%. Tech is still vulnerable, though what it calls prime tech could
outperform more speculative and cyclical parts of the sector.

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The chart
The consumer credit data due later Wednesday may show more evidence of Americans
turning to credit cards in the face of rising prices. That build-up in debt comes as savings
have deteriorated. Analysts at JPMorgan expect the stimulus payments to have burned off
by the middle of next year.

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Steve Goldstein
Steven Goldstein is based in London and responsible for MarketWatch's coverage
of financial markets in Europe, with a particular focus on global macro and
 of financial markets in Europe, with a particular focus on global macro and
commodities. Previously, he was Washington bureau chief, directing
MarketWatch's economic, political and regulatory coverage. Follow Steve on
Twitter: @MKTWgoldstein.

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