US indices are in a bear market, but it might make sense to start covering shorts.
We often see the financial press use the phrase bear market but this current sell-off in US equity is, by all measurements, a full bear market that seems to continue lower as the Fed hike cycle and trade issues with China trade increase. In a piece by CNBC, some key historical points are tabled that show that since WWII bear markets have lasted 13 months on average with stock markets losing 30.4 percent of their value (according to Goldman Sachs and CNBC). And it usually takes 22 months for the market to recover. A drop from the peak price level by 20 percent – as we have seen in the past five months – is a bear market. The S&P 500 dropped from its 52-week high, down 20 percent as of Monday.
We at Classiarius see the pessimism that has spread throughout the market but there are few signs of the economy breaking down or slowing down substantially. Some analysts believe that the US economy will slow by the end of 2019 to under 2.0 percent in GDP terms. When these economic signs of weakness start to surface, the market will shift into full bear mode. The bear markets that we have seen since WWII have lasted 13 months and this one is likely to be much the same. According to general views and the CNBC team even a market “correction” which is a 10 percent drop takes time to recover. From an historical point of view, the corrections last four months after falling 13 percent. Of course we are well past that correction phase and in our humble view – here at Classiarius – this current 20 percent pullback will continue in Nasdaq, S&P 500 and the Dow for several more months and will end up 25 to 30 percent lower from its highs.
We will be updating along the way.