Nasdaq Joins Russell 2000 in Bear Market: What History Says Next

The Nasdaq has tumbled to join the Russell 2000 in bear market territory, marking a significant downturn for the tech-heavy index. With both small-cap and large-cap indices facing substantial declines, investors are left wondering what the future holds. Historical data provides valuable insights into how bear markets for these indices have unfolded and what we can expect moving forward.

Historical Context: Bear Markets and Recovery

Historically, bear markets have been relatively short-lived compared to bull markets. The average length of a bear market is about 9.6 months, while bull markets last around 2.6 years. This historical data suggests that bear markets, while painful, are temporary and often followed by periods of significant recovery. For instance, the S&P 500 has seen an average return of 111% during bull markets, compared to an average loss of 35% during bear markets.

Key Economic Indicators and Market Conditions

Several key economic indicators and market conditions typically signal the end of a bear market for small-cap and large-cap indices. These include interest rate cuts by the Federal Reserve, economic weakness, and changes in market sentiment.

1. Interest Rate Cuts by the Federal Reserve:
- Traders are currently pricing in a 62.5% chance of four quarter percentage point cuts by year-end 2025, with more than 95% odds of the next reduction being at the central bank's June meeting, per the CME FedWatch Tool. This suggests that the Federal Reserve is expected to lower interest rates, which is typically good for small caps. Historically, small-cap stocks tend to benefit from interest rate cuts due to their higher dependence on borrowed money and increased investor speculation as rates on risk-free investments fall.

2. Economic Weakness:
- Equity strategist DeSanctis anticipates a "tough" first two quarters, though no recession, before the Fed possibly comes to the rescue in the summer. This suggests that economic weakness could prompt the Fed to intervene, which has historically been beneficial for small caps. The Russell 2000 has outperformed the S&P 500 during the 12 months following five of the last six presidential elections (83% of the time). This is attributed to small-cap companies earning less revenue from international markets, making them less exposed to tariffs and currency fluctuations.

3. Market Sentiment:
- Lerner noted that because things "don't move in a straight line," it "wouldn't be surprising" for small caps as well as large caps to soon see an "oversold bounce." This suggests that market sentiment could shift, leading to a rebound in small-cap and large-cap indices. The S&P 500 has consistently outperformed the Russell 2000 over long periods. Large-cap companies tend to be more resilient than small-cap companies, and the technology sector has frequently led the market. However, the Russell 2000 has outperformed the S&P 500 during the 12 months following presidential elections, with the only exception coming in 2008.

Current Market Conditions and Future Outlook

The current economic indicators and market conditions suggest that the end of the bear market for small-cap and large-cap indices could be signaled by these factors. Historical data supports the idea that interest rate cuts and economic weakness have typically been good for small caps, and market sentiment could also play a role in signaling the end of a bear market.

Conclusion

In conclusion, the current bear market for the Nasdaq and Russell 2000, while challenging, presents opportunities for investors. Historical data shows that bear markets are often followed by significant recoveries, and current economic indicators suggest that the end of the bear market could be near. Investors should stay informed about key economic indicators and market conditions, and consider diversifying their portfolios to capitalize on the potential rebound in small-cap and large-cap indices.