Is it time for the bear market to take over?

Following the worst year for the stock market in the last decade, will 2019 offer any hope for recovery? Both the London and the European market has so far proven otherwise as they open the new-year in red, with the FTSE 100 Index and the Euro Stoxx 50 Index at the time of writing experiencing a decline of 0.9% and 1.2% respectively.

By definition, a bear market is a situation whereby securities prices fall 20% or more from recent highs coupled with, market cynicism and negative investors’ attitude. The most recent bear market took place in the financial crisis of 2008, after which we experienced the longest bull run in history of around 9.5 years.

It comes as no surprise that investors’ confidence is low in view of the current economic slowdown, trade and political tensions, and rising interest rates that had affected markets for most of the second half of 2018. The negative attitude of investors’ was substantiated by the reversal of the spread between the 2-year and 5-year yield of the US Treasury notes last December 2018, with the 2-year and 10-year spread being at a miniscule of 13 basis points.

The implication of the “inversion” of the 2/10 treasury yield is that investors are more willing to invest in the 10-year treasury notes rather than the 2-year treasury note as there is apprehension on the short-term economic performance, resulting in the price for the 10-year yield to increase and thus the yield to decrease. This is bothersome, as typically investors would want a higher yield for investing their money for 10 years than the return for investing their money for 2 years. If history is anything to go by, previous recessions have always been preceded by a 2/10 year inversion. Therefore, this definitely something that one should keep a close eye on.

Whether the recent drop in markets was a market correction or the commencement of a bear market is an ongoing debate. However, it is widely agreed that a 9.5-year bull market is a good indication that the world economy is at its peak level and should one apply the basic principles of the economic cycle, a peak is followed by a recession. The recent decline in the Asian’s factory activity experienced in December, with China being the world second largest economy also contributes to worrying factors that the world economy is at its peak level.

There are high debates if it is time for the bears to take over from the bulls. It is commonly known that the biggest financial institutions mainly drive markets and it is worth mentioning that their common expectations for 2019 is that “the world’s largest banks and money managers are gearing up for the last hurrah of one of the longest bull markets in history”, as stated by Bloomberg.