Stocks just traded like they do right before recessions begin — and one of Wall Street's biggest bulls warns a 'big test' of the worst-case scenario could fail

The stock market's correction late last year was consistent with its historical pre-recession pattern, judging by its median decline before prior meltdowns, according to RBC Capital Markets. The sell-off was driven by concerns about US economic growth and to what extent the Federal Reserve was mitigating a slowdown.Although stocks have rebounded from their lows, Lori Calvasina, RBC's head of US equity strategy, says they are still poised to face a big test of whether these growth fears are valid or not.The so-called Santa rally was nowhere to be found at the end of 2018. Instead, investors endured a 20% correction from mid-September peak through Christmas Eve. Not only was it driven by fears of an economic recession, its scope was eerily similar to the sell-offs that preceded prior economic calamities, according to RBC Capital Markets. Data from the firm showed the median drop in the S&P 500 prior to recessions dating back to the 1930s was 24%. The average was higher — at 32% — but skewed by uncommon downturns like the Great Recession and tech bubble. Despite this, Lori Calvasina, RBC's head of US equity strategy, remains bullish on stocks — so much so that she raised her year-end price target for the S&P 500 to 2,950 from 2,900.But even as one of Wall Street's biggest bulls, she says the next couple of weeks are full of hurdles that must be cleared in order to lift uncertainty about the economy and company's earnings potential by extension. If stocks proceed to price in a mild recession, the S&P 500 could tumble to as low as 2,200, Calvasina said, in line with its median peak-to-trough decline before prior economic slowdowns.“Stocks face a big test in early 2Q,” she said in a note to clients. She added: “We continue to believe the US economy will soon climb out of the rough patch that the stock market paid the price for in December. But for stocks to hang on to their YTD gains near-term and/or climb higher from here we think investors will need to see evidence that the economy is back on track relatively soon.”Read more: Legendary economist Gary Shilling sounds the alarm on a downward spiral confronting investors — one the Fed has signaled is fast approachingThe jobs market is a primary location where she sees red flags popping up, and where evidence of a continued expansion will be most welcome to investors.Calvasina said all the employment indicators she tracks, from announced job cuts to manufacturing indexes in Kansas City and Philadelphia, have fallen or stalled in the last few months. She added that on the bright side, most of these indicators are still high relative to history and above the levels they fell to during the 2015-2016 growth scare. Another component of the stock market's test lies in whether big investors pile back into equity funds. Their allocations to tactical asset allocation and global large-cap equity funds fell from near-historical peaks amid the correction in Q4, Calvasina said. The slowdown in flows into equity funds has also been captured by Bank of America Merrill Lynch, which reported $20.7 billion in outflows this week. Cumulative flows into tech stocks, a major contributor to the bull market's gains, have fallen off a cliff and to levels last seen in 2017, the bank's data show. Looking beyond how investors are positioned now, Calvasina said they may soon consider selling US stocks to fund purchases in non-US markets that are not as richly valued. A chorus of experts has been recommending emerging markets to their clients, expecting a sharp rebound this year after last year's plunge.For Calvasina, this possible rotation is just another reason to worry about how US stocks fare in the coming weeks. On Friday, the credit market provided a new reason of its own: the spread between the 3-month bill and 10-year note inverted for the first time in 12 years. Inversions like this — notably on the 2-10-year yield curve, which is still above water — have served as reliable recession indicators.