,bubble clock“Dig into trends that may indicate further economic and/or housing market problems.
Discussion: The stock market is officially in a bear market slump, and that’s rarely good news for California’s economy.
Source: Using the definition of a bear market as a 20% drop in the S&P 500 stock index, my trusty spreadsheet looked at what happened after the start of Wall Street’s five such recessions before the pandemic. To assess the outcome, I looked at California’s economy in terms of 12-month changes in unemployment, jobs, total statewide personal income, house prices (FHFA index) and 30-year mortgage rates.
Wall Street’s latest bear market officially began in January. In the past, California’s economy has generally reacted sluggishly, at best.
In the year following the start of these five deep market dives, California’s unemployment rose from an average of 6.1% to 7.6%. Meanwhile, growth for jobs (2.1% to 0.2%), income (2.1% to 7.7%) and house prices (from 5.1% to 0.9%) cooled.
Borrowing costs fell, with a backdrop of weakness extending from Wall Street to the Pacific Coast Highway. Mortgage rates have dropped by an average of 1.3 percent in one year.
Consider these five bear markets and how they fared in California.
From November 1980 to August 1982, 27% stock loss: Geopolitical turmoil, notably a billion oil embargo, a change of presidents (from Jimmy Carter to Ronald Reagan), and inflation-bashing double-digit interest rates caused stocks to dive. The pain of Wall Street certainly foreshadows the ongoing economic crisis in California.
A year after this bear market began, California unemployment rose from 8.2% to 11% as the number of jobs declined from 0.7% growth to 2.2%. Statewide earnings growth almost came to a standstill at 0.7% from 9.9%.
Home prices that were rising 8.4% at the start of this bear market shifted to a 1.4% loss 12 months later. And the decline came despite mortgage rates falling from 17.7% to 14%.
From August 1987 to December 1987, 34% stock losses: The return from the dark days of the early 1980s ended abruptly seven years later, highlighted by the Black Monday stock crash in October.
Curiously, California’s economy was largely protected from any downturn in the year after this bear market began.
Unemployment fell from 5.6% to 5.3% as job growth increased from 3.4% to 3.8%. Earnings growth was good — 7.3% to 3.4% — but the stock’s losses were part of that chill.
From these stock gyrations the house seemed like a shelter. Annual appreciation soared from 11% to 16.3% as mortgage rates flattened out as a bargain in those days – 10.5%.
From July 1990 to October 1990, 20% stock losses: The economy may have ignored the stock drama of 1987 and 1989, but the Golden State business machine eventually ran out of steam in the early 1990s.
This brief and minor bear market was certainly felt in California over the next and subsequent year. Unemployment rose from 5.9% to 7.9% and 2.5% job growth decreased to 1.3% per year. Earnings growth also cooled to 2.5% from 7.8%.
And it was also the beginning of the housing malaise of the 1990s. 12 months after the market stagnation, home prices rose 5.6 percent to a 1.3% loss. Falling Rates—The 10.1% to 9.3% in the year after the bear market began—couldn’t prevent six more years of home-value declines.
From March 2000 to October 2002, 49% stock losses: Wall Street weathered the recession far faster and more strongly than California’s economy in the early 1990s.
Investors flocked to the tech “dot-com” stocks with bubbly enthusiasm. When that error was corrected, a sharp and deep bear market emerged. Yet California’s broader economy suffered minor damage from this Wall Street debacle.
This disconnect is especially curious considering that the bear market was largely linked to the crashing stocks of many of the state’s technology companies.
A year after the bear market began, statewide unemployment dropped from 5% to 4.8%. However, job growth was freezing, from 3.4% to 3.1%, and income growth declined, falling from 9.6% to 3.4%.
House prices rose again amid uncertainty and rose by 10.9 per cent to 13.6%. Falling mortgage rates also helped, which fell to 7% from 8.3% a year later.
From October 2007 to March 2009, 57% stock losses: Oddly, housing’s exodus from the dot-com stock route may have helped create the foundation for huge stocks and an economic downturn.
An overabundance of tech stocks turned into an unhealthy passion for housing. A huge real estate bubble overheated the entire economy. Well, until this irrational enthusiasm turned into a global recession.
In the year after the bear market began, unemployment in California rose from 5.7% to 8.8%. Job growth of 0.6% turned into a 2.6% annual loss. Earnings growth of 4% all but evaporated to 0.6%.
Please note that housing was a mess before the stock was officially in bear market condition. California home depreciation declined 10.4% to 22.7% a year later, despite the rate falling from 6.2% to 5.8%.
On a scale from zero bubbles (no bubbles here) to five bubbles (five-alarm alert)… Five bubbles!
There is a misconception that stocks are somehow disconnected from macroeconomic realities. These days, we see them around the clock, and their volatility can make it feel like a casino. But you can’t ignore Wall Street’s decline.
Plunging stocks usually reduce investors’ appetite for risk. It hurts California businesses, which happen to thrive when they take risks.
Bear markets also discourage C-suite types whose worries often turn into layoff-minded thinking.
These types of reactions harm consumer spending habits along with shrinking portfolios.
This is a recipe for a chill California business environment. Remember, this state’s economy took a beating as Wall Street was bitten by three of the last five bear markets.
And I’d argue after two other stock fiascos — 1987 and 2000 — California’s economy was very fortunate. The real estate bubble of those eras ultimately delayed the economic pain.
Sounds like 2022?
Jonathan Lancer is business columnist for Southern California Newsgroup. He can be contacted at firstname.lastname@example.org