How to recognize bear markets

So how do you recognize bear markets?

As Darren Winters explains, bear markets happen when the stock major indices keep making new lows over time. Moreover, stock rallies tend to be lower in cyclical bear markets. So bear markets also have a lot of smaller stock rallies but the long-term price trajectory of stocks in a bear market is down. Bear markets are particularly damaging to investors with a hold strategy and short time frame, for example, those investors that are expecting to retire in the short term and those who need to liquidate their investments due to an emergency.

What is the average duration of a bear market?

The average length of a bear market is 367 days. The conventional wisdom says that bear markets usually last 18 months.

So how frequently do bear markets occur?

How to recognize bear marketsBear markets occurred 32 times between 1900 and 2008, with an average duration of 367 days. Bear markets typically happened once every three years.

Darren Winters explains that bear markets usually go hand in hand with recessions, which is when the economy stops growing then contracts. The macroeconomic data from around the globe is pointing to a global economic contraction. In Europe the largest economy, Germany shrunk by -0.2 percent between Q2 and Q3 for the first time in three years. Over in Asia, Japan’s economy shrank more than expected in the third quarter, hit by natural disasters and a decline in exports. Trade protectionism is starting to take its toll on overseas demand.

Furthermore, it is no surprise that China’s economic slowdown is contributing to the recent tumbling crude oil prices. China, the world’s factory, is also the largest consumer of oil. Crude oil prices have crashed during a time when the US began to enforce sanctions on Iranian exports on Nov. 4.

Moreover, the Bloomberg commodity index is hovering near its 52 week low at 83.86 at the time of writing this piece which is further evidence of a slowing economy.

A contracting global economy is an indication of pending bear markets. So you can recognize a bear market by gauging what phase the global economic cycle is in, bearing in mind that stocks quoted on the main indices are multinationals.

Bear markets always occur when the central bank ends its expansionary monetary policy

Historic evidence shows that when the Fed, the world’s central bank by default tightens monetary policy that is usually followed by economic recessions and bear markets in stocks. Indeed, the Fed’s transition to a normalization of monetary policy is beginning to take its toll on asset price. ‘We’ve raised interest rates to a level that it’s hurting asset prices’ Ray Dalio, Bridgewater Associates.

So the stars are aligning for bear markets in stock, commodities, junk debt and any asset that has been propped up by the Fed’s cheap money.

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