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Goldman Sachs’ chief global equity strategist outlines what to look for in a sustained recovery.
Stock markets dipped into bear market territory after the April 2 tariff-induced meltdown, as both the Nasdaq and Russell 2000 were down more than 20% for the year.
Since then, both have recovered a bit, with the Nasdaq and Russell 2000 both off about 16% year-to-date. The S&P 500 is down 10% while the Dow Jones has dropped 8%.
But from the recent market peak on February 19, the Nasdaq has shed about 19% while the S&P 500 has fallen around 14%.
So, while it might not be a bear market at the moment, the markets have certainly corrected, and there is much uncertainty ahead.
However, the good news is that bear markets and corrections typically don’t last long, certainly not as long as the average bull market.
The 3 Types of Bear Markets
While every market is different, there are broadly three different types of bear markets, explained Peter Oppenheimer, chief global equity strategist at Goldman Sachs Research, in a recent commentary called, “Are Bear Markets in Stocks an Investment Opportunity?”
One type is a structural bear market, which is triggered by structural imbalances and financial bubbles, like the Global Financial Crisis of 2007-2008. The second type is a cyclical bear market, which is driven by economic cycles and some sort of catalyst like rising interest rates or a recession. The third type is an event-driven recession, triggered by a one-off shock, like, for example, the tariff policy.
Oppenheimer and his team characterize the current environment as event-driven. Event-driven bear markets are the least worrisome of all, as they tend to be shorter with quicker recovery times.
“However, it could easily morph into a cyclical bear market given the growing recession risk,” Oppenheimer stated in the report.
The 4 Signs of Recovery
Oppenheimer and his team took a deep dive into the bear markets since the 1980s and discovered some patterns. Among them, they found that the average bear market lasts only 44 days, and most bear markets recover within a year.
As to when this market will recover, Oppenheimer outlined four signals that he is looking for before a sustained rebound in stock prices occurs.
- Attractive stock valuations. Valuations are still historically high, even though they have come down in recent months.
- Extreme positioning. Oppenheimer said investor portfolios currently signal a great deal of pessimism and a low appetite for risk. Thus, they will be looking for the repositioning of holdings as a sign.
- Policy support. This would encompass a shift in trade policy, interest rates or something to spur markets.
- A sense that the second derivative of growth is improving. The second derivative is essentially an acceleration in the rate of growth.
Oppenheimer posits that economic growth looks unlikely to accelerate significantly in the near term. He also reiterated that an event-driven bear market can turn into a cyclical one if corporate profits shrink and it becomes a recession. But he added that the current environment does not have the characteristics of a severe structural bear market.
“Broadly speaking, the corporate sector has healthy balance sheets, and banks are well capitalized. Equally, while equity valuations are high, particularly in the US, they have not been in bubble territory, in our view,” Oppenheimer stated. “This makes us more confident that this bear market will be more modest in depth and duration than previous structural downturns.”
For now, until these signals start to flash, investors should consider international portfolio diversification, as US stock valuations remain elevated amid higher inflation and the potential for lower corporate profitability.
