100 years of stock market crashes

BNPP with a useful note.

Equities: 100 years of crashes – Navigating capitulation

A recessionary bear market: If we are past the peak in inflation, the pressure from rate-driven P/E multiple compression may slow. However, it could be a case of out of the frying pan, into the fire. In order to tame inflation, the Fed has tightened policy aggressively. Our US Economics team now anticipate this tipping the US into recession next year. In 100 years of Crashes: Covid-19 crisis playbook, 17 April 2020, we highlighted that dynamics in recessionary bear markets tend to be distinct from those without a recession. Reaching a capitulation point: Recessionary bear markets historically have often ended with a capitulation. We are calling for a capitulation event in equities 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. Implied volatility YTD has underperformed and skew has aggressively flattened. We highlight our view on how that will change if we see an equity market capitulation early next year. We also examine the impact that a shift in volatility dynamics could have on products such as VKOs (put with volatility knockout) and the impact of structured products. The two most recent equity bear markets accompanied by US recessions saw the VIX peak above 80. We argue that those two instances are poor representations of how equity markets typically behave in a recession, and instead lay out what we view as a more typical path. Also despite geopolitical risks in Europe, a European crisis could likely be different from previous Euro-centric crises.