Personal Wealth Management / Market Volatility
“There’s simply no single answer to the question: What causes a bear market? … There is no fundamental indicator on its own, no technical indicator on its own, no single silver bullet, no nothing on its own perfectly predicting when a bear market will start.”
-Ken Fisher, The Only Three Questions That Count.
We believe that, with thorough research and analysis, impending bear markets can be identified and some of the bear market decline can be avoided. Bear in mind, though, no one has consistently and correctly called every bear market in advance. This includes us—although we have helped counsel thousands of investors through good times and bad.
Following are some indicators, or signs, we monitor that characterize negative fundamentals, euphoric investor sentiment and potential big negatives. But remember: No one indicator alone is perfectly predictive of bear markets.
Negative Fundamentals
| Indicator | Description |
| Weak Corporate Earnings | Are stock market earnings degrading or falling for multiple successive quarters? |
| Inverted Yield Curve | Are overnight interest rates higher than long-term, 10-year bond yield rates? |
| Faltering Revenue Growth | Earnings can be affected by outside factors; sales, less so. |
| High Inventories, Low Demand | Are business inventories piling up, while consumer demand seems to be tailing off ? |
| Trend, Not Data Point | One data point isn’t sufficient evidence. The trend should recur for multiple readings and in multiple nations. |
Euphoric Sentiment
| Indicator | Description |
| High LBO Activity | Are businesses taking on debt to buy competitors (leveraged buyouts)? |
| Overpriced IPOs | Are extremely low-quality IPOs flying off the shelves at sky-high valuations? Are companies going public solely for the sake of going public? |
| Rising Corporate Debt | Are businesses taking on more debt, despite slowing or downward trending sales and earnings? |
| Uniformly Bullish Media | Is the media consistently showing optimism—and are those who were already optimistic now euphoric? |
| “It’s Different This Time” | Is there widespread discussion of how “It’s different this time”? |
| Euphoria | Is everyone talking about stocks? Watching CNBC instead of the World Series or the Super Bowl? Are investors flooding into equity mutual funds? Is your taxi driver giving you stock tips? |
A Wallop—Big Enough to Shave Several Trillion off Global Economic GDP
| Indicator | Description |
| Escalating Tariffs / Trade Wars | Are countries around the world constructing extreme barriers to trade? |
| Monetary Policy Errors | Has a major central bank made a severe policy error? |
| Regulatory Changes | Have there been massive changes in regulations or accounting rules that may adversely impact businesses? |
| Major Geopolitical Conflict | Is a major, global conflict likely to erupt? |
| Other Unknown Negative | Is there something else that can knock several trillion dollars off global economic GDP? |
A common misconception is that regional geopolitical conflicts are likely to cause bear markets. Note that, per the table above, a geopolitical conflict must be major and global in nature to end a bull market. Smaller, regional conflicts typically aren’t powerful enough. For instance, the current bull market has already surmounted fears surrounding the Israel-Hamas conflict, Russian-Ukrainian crisis and North Korean missile tests—those fears have simply become bricks in the “Wall of Worry” this bull has climbed. Even when global powers escalate a local war, it doesn’t usually derail a bull as long as the conflict remains geographically confined. Exhibit 1 shows market movements around several regional conflicts that similarly went the way of the “Wall of Worry.”
Exhibit 1: Regional Conflicts Don’t Knock Stocks
Source: FactSet, as of 8/14/2014. S&P 500 Price Index Level from 1/1/1967 – 1/1/2007.
Although stocks may fluctuate on uncertainty as a conflict begins, once the conflict is actually underway, the market typically digests and moves beyond it. Localized conflicts don’t have the power or far-reaching economic impact to derail a global bull market. Thus, geopolitical conflicts rarely have a lasting impact on market direction. The one exception is the onset of World War II, which Walloped the ongoing bull market in 1937 when it became clear it was escalating into a global war. Still, stocks bottomed in 1942, a full three years before the end of World War II. Stocks can and do rise during periods of even significant armed conflict. A major, unexpected conflict inflicting global damage would be big enough to be a Wallop.
Exiting the stock market is one of the biggest investment risks you can make. If you are wrong and the market continues to climb, you have missed out on returns that are important for a long-term stock investor’s objectives. Deciding to sell or go defensive needs to be tactical and shouldn’t be based on gut feelings. Watching for these market signals can help you remain impartial and help you identify if a bear is ahead so you can make decisions accordingly.
FAQs
A bearish market is typically driven by bearish indicators or factors such as economic downturns, geopolitical tensions, or negative sentiment among market participants. One of the key indicators of a bearish trend is a sustained downtrend in major market indices.
What are safe investments during bear market? ›
Another way to hedge against bear markets is to invest in stocks that pay dividends over those that do not. Dividend-paying stocks usually outperform non-dividend-paying stocks — typically with less risk, according to 2022 research from Johnson Asset Management.
Is DCA a good strategy in bear market? ›
When it comes to investing, dollar cost averaging (DCA) is a popular strategy that involves investing a fixed amount of money at regular intervals over a long period of time. This strategy is commonly used to reduce the impact of market volatility on investment returns, especially during a bear market.
Should I invest in index funds during a bear market? ›
However, investing in index funds during a market downturn can be a smart strategy for long-term investors. This is because index funds track a specific market index, such as the S&P 500, which means they contain a broad range of stocks, providing diversification and reducing risk.
What is the best bear and bull indicator? ›
Elder Ray Index: The most used bear and bull power indicator
This EMA line shows the average value of the trending price levels in the bullish or bearish trend. When bulls are more powerful, the prices are said to increase, and EMA slopes upwards.
How to predict a bear market? ›
Widening credit spreads are a clear indicator of a potential bear market. In addition to looking at Treasuries and corporate bonds, some investors look at high-yield bonds (e.g., junk bonds) versus investment-grade corporate bonds.
What to invest in right now bear market? ›
Investing in bonds is also a common strategy to protect oneself during a bear market. Bond prices often move inversely to stock prices, and if stocks decline, a bond investor could stand to benefit. Short-term bonds in a bear market could help investors weather the (hopefully) short-term downturn.
Where to put money during a bear market? ›
Bonds also are an attractive investment during shaky periods in the stock market because their prices often move in the opposite direction of stock prices. Bonds are an essential component of any portfolio, but adding additional high-quality, short-term bonds to your portfolio may help ease the pain of a bear market.
What not to do in a bear market? ›
Avoid knee-jerk reactions.
By selling when the market has fallen steeply, you're at risk of locking in a permanent loss of capital. To optimize your potential over the long term, what's crucial is time in the market, not market timing.
Should I DCA weekly or monthly? ›
Investment goals: Your time horizon is crucial. If you're aiming for long-term growth, a monthly DCA might suit you, allowing you to ride out short-term market fluctuations. In contrast, if you're after short-term profits, a weekly or bi-weekly DCA can help you take advantage of quicker market movements.
You should consider adopting a portfolio rebalancing strategy—even during down markets when it's tempting to let your “winners” keep growing while your “losers” are taking their lumps. That's because rebalancing helps you buy low and sell high—an investing adage that's easy to say and hard to do.
What are the safest investments in a bear market? ›
Treasurys are generally considered "risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.
Are we in a bear market in 2024? ›
However, the index only recently finished recouping its bear-market losses and today sits just slightly above its January 2022 peak. With potential economic threats remaining and market uncertainties looming in 2024, investors may still need to have patience before a truly durable bull market can get underway.
Where are big investors putting their money? ›
Real estate. As a result, centimillionaire portfolios often feature "very strong, stable pieces of real estate," Buscemi said. These wealthy individuals gravitate toward "trophy asset" Class A properties, or investment-grade assets that typically were built within the last 15 years.
What are the signals of a bear market? ›
Government interventions in the economy can also trigger a bear market. For example, changes in the tax rate or the federal funds rate can lead to a bear market. Similarly, a drop in investor confidence may also signal the onset of a bear market.
What is the bear market probability indicator? ›
For the probability of a bear market ("P[BM]"), we use the standard bear market definition of a decline of 20% or greater. This calculation is called the Prior in the Bayesian Inference method and represents the unconditional probability of our dependent variable.
What are the indicators of bear and bull market? ›
A bear market is a 20% downturn in stock market indexes from recent highs. A bull market occurs when stock market indexes are rising, eventually hitting new highs. Historically, bull markets tend to last longer than bear markets. Bear and bull markets can affect investor confidence and behavior.
How do you measure a bear market? ›
Watch for 20%: Market cycles are measured from peak to trough, so a stock index officially reaches bear territory when the closing price drops at least 20% from its most recent high (whereas a correction is a drop of 10%-19.9%). A new bull market begins when the closing price gains 20% from its low.
