“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
While no one we know of has consistently and successfully called every bear market in advance—including us—we do believe it’s possible to identify some bear markets early on with thorough research and analysis. But the decision to sell out of equities shouldn’t be taken lightly—shifting your portfolio into a defensive strategy is one of the biggest risks you can take with your money. If you’re wrong, missing out on positive bull market returns could impact your ability to reach your investing goals.
Following are some of the indicators, or signs, we monitor that we believe may be able to help you identify a bear market is coming: negative fundamentals, euphoric investor sentiment and potential big negatives. Remember, no one indicator alone is perfectly predictive of bear markets—and every bear market is different—but these indicators could help you recognize whether what you’re seeing really is a bear market or not.
Negative Fundamentals
Euphoric Investor Sentiment
A Wallop—Big Enough to Shave Several Trillion off Global Economic GDP
Exiting the equity 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 equity 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 market is ahead so you can make decisions accordingly.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
