Since the turn of the New Year the stock markets seem to just keep falling. Partly in cause of Chinese growth coming in at 6.9%, it’s lowest in decades (25 years to be precise), oil dropping below $30, fears of the Fed tightening cycle and worries of a BREXIT spooking markets. Is global demand waining? Are we falling into a bear market?
What is a bear market?
A bear market is defined as a -20% fall, typically over a 2 month period. The FTSE100 is down -7.16% since November 19th 2015, therefore this market is more typically defined as a market correction. However it is worth noting that many analysts are arguing the FTSE is now in official bear territory, as it is -20% lower than the April 2015 peak.
Why does it matter?
Bear markets often occur when the economic outlook is bad. However it is possible a correction may turn into a bear market when investors get jittery and start selling off in herd fashion. Bear markets tend to result in prolonged stock market losses, from anywhere between 7-15months.
We should be concerned about falling into a bear market, as the current market sentiment is important. America is due another recession and falling oil prices has led to large job losses in oil and a reduction in investment. The Fed increasing rates has also began to expose cheap credit, which has already led to a large sell off in junk bonds in December.
Whilst this looks like it could just be a repeat of the August 2015 correction, I have a sense that cheap credit is still rife in propping up the markets and would not be surprised to see another crisis towards the end of this year.