By the end of last week, the S&P 500 had fallen 23.4% off its high, putting the market well within bear territory.

Unfortunately, markets that enter bear territory are historically signaling there will be more pain ahead. The average bear market lasts 18.6 months, and sees the S&P 500 fall 38.3% before it has bottomed and the gains begin returning. And bear markets that accompanied recessions have even worse numbers.

So it might pay for investors to batten down the hatches and prepare for a storm which may last for a while.

The May Consumer Price Index report was a shocker that beat all expectations for inflation. The Fed similarly responded more aggressively than had been predicted prior to that report. Then came the Fed’s Survey of Consumer Expectations, showing the median expectation for inflation one year away was 6.6% in May, which tied the highest reading since the survey first published, in June 2013.

The the producer price growth measure in May surged to 0.8%, with a 10.8% gain year over year. Core PPI rose 0.5% for the month and 8.3% for the year. Prices were rising increasingly fast for both goods and services.

Then the National Federation of Independent Business’s small business Optimism Index dropped to the lowest level since the full weight of the pandemic hit in April 2020 over inflation, and all the other bad news.

And all of these bad news reports were merely continuations of already negative trends that had been building for months.

And so far the Fed has been tightening monetary policy for months, with no sign of any impact yet. The latest increase was a massive 0.75% rate hike last week.

Fed chairman Jerome Powell said on Wednesday, “We have to restore price stability. It’s the bedrock of the economy. If you don’t have price stability, the economy is not going to work as it’s supposed to. The worst mistake we could make would be to fail [on lowering inflation. We have to restore price stability. We really do.”

That means it is likely there will be months of economic chemotherapy in the form of rate hikes, lowering inflation, but at the same time cooling growth, cutting jobs, and pushing down the markets.

Powell practically said the Fed wanted a bear market to ensue, when he said, “Over the course of this year, financial markets have responded and have generally shown that they understand the path we’re laying out.”

Vickie Chang, global markets strategist at Goldman Sachs said, “The recent market correction has been a Fed-driven one, as equities have steadily priced in more tightening this year while simultaneously worrying that such front-loaded tightening will ultimately lead to a policy reversal. Our US economists also do not see major financial imbalances of the sort that led to the retrenchment episodes of the 2000s. So, for equities to recover in a sustained way, history suggests that this kind of monetary tightening-induced contraction is most likely to end when the Fed shifts policy direction. While a shift towards Fed easing is unlikely without an outright move into recession, as in late 2018, a clear signal that tightening risks are receding may be sufficient.”

This creates a situation where bad news for the economy becomes good news heralding the beginning of the end of this phase, and the return of a healthy economy.

To that end, recent signs that companies are paring their workforces, while a sign of increasing unemployment to come, are also a sign the Fed’s policy is beginning to work, and we are one step closer to inflation subsiding and the Fed letting up on their tighter monetary policy.

Then on Tuesday, retail numbers came out showing sales slowed in May by 0.3%. At the same time, manufacturing is cooling. Industrial production only climbed by 0.2% in May, less than expected. Manufacturing declined unexpectedly 0.1%.

Jobs too, appear to be seeing the effect. Labor market data firm Linkup said, “For the second month in a row, LinkUp data reveals job listings on company websites were down, with overall listings dropping 4.2% in May… At the industry level, companies with the largest drops in job listings in May include those in: Utilities (-8.8%); Information (-7.3%); and Transportation and Warehousing (-6.8%)“

Additionally, the Conference Board’s Leading Economic Index has now dropped for three months in a row. The Conference Board’s Ataman Ozyildirim said, “The index is still near a historic high, but the US LEI suggests weaker economic activity is likely in the near term — and tighter monetary policy is poised to dampen economic growth even further.”

For its part, the Fed feels it can negotiate this economic situation without triggering a recession. Powell has said, “We’re not trying to induce a recession now. Let’s be clear about that.” Of course Powell also said, “There could be some pain involved in restoring price stability.“

One of the big complicating factors is consumers are sitting on massive savings built up during the pandemic, which will allow them to spend despite Fed policy.

Moody’s Analytics’ Mark Zandi estimates that pile of savings sits at about $2.7 trillion. Those savings are partly why businesses have been able to raise prices to the extent they have, creating the inflation which now threatens everything.

On the other hand it is worth considering the Fed’s concern is inflation, not cooling the economy. They are just cooling the economy to reduce demand and lower prices. However another way to lower prices is to increase supply. And as we get farther from the pandemic, and supply chain snarls work themselves out, supply is slowly increasing. That will help with inflation beyond anything the Fed is doing with interest rates.

Census Bureau data released Wednesday showed replenished inventories in April. And this month’s regional manufacturing surveys show reduced delivery times, another sign of increasing supply. All of this might point to inflation possibly coming down faster than it now appears, before there is a significant economic slowdown.

And Powell has indicated the Fed will respond quickly once it sees prices coming down and inflation cooling off.

That means the markets could get healthier faster than is currently expected.