Would an entry in bear market territory be justified for the U.S. equity market?

The beginning of the year was a particularly turbulent one for financial markets and equity markets in Japan and Europe have recently entered into bear-market territory. The U.S. stock market was also ruffled by the spike in risk aversion, in addition to being bothered by a downturn in profits and concerns about the health of the U.S. industrial sector. While the S&P 500 has recovered a bit recently, the climate remains volatile and it would not take much more by way of additional declines to also lead it into bear-market1 territory. However, a bear market also implies that investors discount a high probability of recession in the United States. In this Economic Viewpoint, we analyze the causes of investor pessimism and weigh in on the question of whether the major fall in the S&P 500 is fully justified from a fundamental standpoint. Our conclusion is that investor bearishness is overdone and that the U.S. stock market is poised to soon constitute an attractive opportunity.