Recent discussions have intensified on whether financial markets are officially entering bear territory. A bear market is typically defined by a decline of 20% or more from recent highs. The S&P 500 recently experienced a 10% drop from its previous high, signaling a correction. Corrections are relatively common and can serve to reduce overvaluation, but they often raise concerns about the potential for a more prolonged downturn.
Ned Davis Research’s Bear Watch Report employs ten indicators to differentiate between market corrections and the onset of cyclical bear markets. When at least five of these indicators reach bearish thresholds, the report issues a bear market alert.
Historically, such alerts have preceded median maximum drawdowns of approximately 20% in global price indices over the past forty years. Maximum drawdowns (MDD) measure the largest observed loss from a peak to a trough in a portfolio before a new peak is seen. This metric serves as one available indicator of downside risk over a defined time period.
Thus, past bear market alerts have typically been followed by significant declines in global market values, with the median of these declines being around 20% - ripe of bear market territory.
As of the latest NDR analysis, two indicators have signaled caution: a breadth indicator in December (when most global stocks fell below their 40-week moving averages), and a sentiment indicator last month, reflecting a downturn from high optimism. However, six other indicators, including those on price and volatility, have not yet reached warning levels.
Understanding these indicators is particularly relevant in today’s investment environment. Recent market volatility, influenced by trade tensions and tariff implementations, has led to significant stock market declines. Monitoring these indicators can provide valuable insights into whether current market movements are temporary corrections or signals of more prolonged downturns, aiding investors in making informed decisions amidst market uncertainty.
NDR’s research piece also provides ‘Secular Bear Watch’ indicators, which informs of the possibility towards a longer bear consistency versus the shorter-term cyclical downturns – the aggregate of which are currently at “warning levels.”
