15 years, 10 months, four weeks and two days into the current bull market, some investors are asking whether a bear is on the horizon.
The S&P 500 is up 320% since the bull market began in 2009. Stock prices have powered forward thanks to robust earnings growth. Investors have also been willing to pay a higher premium for those earnings, as seen in expanding price-to-earnings ratios.
While there is no single indicator that can predict market turns on its own, here are six things analysts and investors are watching to see if the next bear market, typically defined as a 20% decline from a recent peak, is around the corner.
We may already be part of the way there. The S&P 500 is 6.12% off its all-time high reached July 26, 2019.
S&P 500 Index
Bear market (peak to trough)
19982000'02'04'06'08'10'12'14'16'18'20'22'24500100015002000250030003500Dot-combubble burstsFinancial crisis6.12%from mostrecent peak
Source: SIX
When do you think the next bear market will start?
Within three months Three to six months Six months to a year More than a year
1High-Yield Bond Spreads
What It Is
A measure of what riskier companies pay to borrow compared with what the government pays. These high-yield bond spreads have historically picked up signs of economic stress earlier than other assets. When spreads are tight, investors tend to think that even the weakest companies will be fine. When they are wider, it is harder for these companies to access loans, crimping profits and signalling that investors believe defaults are on the horizon.
What to Watch
A steady trend higher in high-yield bond spreads accompanied the last two stock market peaks. It signalled that investors were getting wary about riskier companies’ ability to pay back debts.
ICE BofAML US High Yield Master II Option-Adjusted Spread
pct. pts.19982000'02'04'06'08'10'12'14'16'18'20'22'240510152025Spreads jumpas marketpeaksSteep marketdrop
Note: Through Aug. 14, 2019
Source: ICE via Federal Reserve Bank of St. Louis
‘This tells me whether the most-stressed companies have the cash flow to pay their debts. If not, to me that’s a signal that we’re rolling over, and credit markets tend to tell you first.’
Alicia Levine, chief market strategist at BNY Mellon Investment Management
2Yield Curve Steepness
What It Is
The yield curve is one of the most closely watched indicators of the stock market’s health, measuring the interest rates paid on debt of various maturities. When the economy is strong, the yield on long-term government bonds is typically higher than on short-term debt, reflecting confidence in the long-term economic outlook. When the yield curve inverts, and short-term yields surpass long ones, it’s a sign investors are worried that inflation—and growth—will be low in the future. High short-term rates tend to crimp business and consumer spending, slowing the economy and putting pressure on corporate profits.
What to Watch
Inversions often precede recessions and bear markets for stocks. This measure did not invert until after the 1987 bear market, but did precede the bears of 1980, 2000 and 2007. Investors are staunchly divided over whether an inverted yield curve on U.S. Treasurys can still signal a bear market, or whether rates have been distorted by years of unorthodox global monetary policy that keep yields on long-term debt low.
Gap between 10-year and 2-year Treasury yields
pct. pts.19982000'02'04'06'08'10'12'14'16'18'20'22'24-1.0-0.50.00.51.01.52.02.53.0Gap turnsnegative
Note: Through Aug. 14, 2019
Source: Federal Reserve Bank of St. Louis
‘It’s an incredibly useful forecasting tool for the peak in the stock market.’
Jeffrey Kleintop, global chief investment strategist at Charles Schwab
3Deal Activity
What It Is
The total dollar value of mergers and acquisitions by month.
What to Watch
A big pickup in deal activity has historically come toward the end of bull markets. A jump in mergers can signal that sentiment has turned excessively optimistic—or that companies see it as the only way to grow as the economy decelerates. Mergers and acquisitions spiked in 2000 and 2007 shortly ahead of the stock market peaks in a sign of excessive risk-taking. More recent peaks have been false alarms, though a spike at the end of 2015 was followed by a stock market correction that fell short of a bear market.
Global value of announced mergers and acquisitions
billion19982000'02'04'06'08'10'12'14'16'180100200300400500$600Deal activity spikes aheadof market peak
Note: Through November
Source: Dealogic
‘Enthusiasm for [deal] activity tends to reflect broader economic optimism and coincides with booms in stock prices and credit expansion. However, history shows that these M&A waves are late-cycle indicators. Their demise often coincides with the end of the business cycle.’
Abi Oladimeji, chief investment officer at Thomas Miller Investment
4Weekly Jobless Claims
What It Is
A weekly count of people filing to receive unemployment insurance benefits. Market participants view the figures as a key leading indicator of the U.S. labor market, the health of the broader economy, and thus the ability of companies to generate cash.
What to Watch
When unemployment rises, consumers spend less money, which crimps what companies take in. Analysts suggest looking for a consistent rise in jobless claims after a steady period. If this happens at the same time as weakness in the monthly U.S. jobs report, it is an ominous sign for the economy.
Four-week moving average of initial claims
19982000'02'04'06'08'10'12'14'16'18'20'22'240100,000200,000300,000400,000500,000600,000700,000Jobless claimsbegin to climb
Note: Seasonally adjusted; through week of Aug. 10, 2019
Source: Labor Department via Federal Reserve Bank of St. Louis
‘Jobless claims are clearly a leading indicator of recessions […] They start to flash red on the economy when they start to rise on a four-week average basis, likely after a flattish period, and then continue to work gradually higher. That’s just a sign that something is likely amiss in the job market.’
Bob Baur, chief global economist at Principal Financial Group
5Investor Sentiment
What It Is
The AAII survey is a barometer of American retail investor sentiment that asks participants to predict the direction of the S&P 500 over the next six months.
What to Watch
Look for extreme highs and lows of investor bullishness, says Charles Rotblut at the AAII. When investors get too optimistic, they tend to run down their savings and overspend. There’s typically less cushion to protect the market, allowing selloffs to gain momentum. This measure worked very well just before the dot-com bubble burst, and spiked just before selloffs in 2011 and 2018.
American Association of Individual Investors Sentiment Survey, percent bullish, weekly
%19982000'02'04'06'08'10'12'14'16'18'20'22'2401020304050607080Record-high optimism
Note: Through week of Aug. 15, 2019
Source: American Association of Individual Investors
‘When you’ve got confidence among players, they start engaging in bad behaviors. They create excesses and the bear has something to bite.’
Jim Paulsen, chief investment strategist at the Leuthold Group
6What the Market Thinks
What It Is
Think of this as the market crowdsourcing predictions of a bear market. As measured through options expiring in roughly six months, it is the estimated probability of a 20% or more drop in the S&P 500, the typical definition of a bear market. Economists at the Federal Reserve Bank of Minneapolis found indicators like this useful as a gauge of current expectations for future prices, but it’s really more a measure of what investors think right now than a predictive indicator.
What to Watch
A relatively new measure, this chart spiked during the financial crisis and rose sharply during other recent episodes of market stress, including the 2016 China growth scare that sent markets tumbling.
Market-based probability of an S&P 500 bear market within 6 months
%19982000'02'04'06'08'10'12'14'16'18'20'22'24051015202530
Note: Through week of Dec. 19, 2018
Source: Federal Reserve Bank of Minneapolis
