This post was taken from our January 8th weekly report.

We would characterise US equity indices today as being in a bear market. The official definition is a 20% decline from the recent high, close to close, but what does this mean in practice for investors? (The S&P 500 and the DJI are not in official bear market territory, but they are extremely close, and we would class them as being in one, joining other indices such as the Wilshire 5000, the Russell 2000 and the Nasdaq.) Bear markets are very difficult to trade for both bulls and bears. The primary trend is down, but the counter-trend rallies can be violent and extended. For instance, in Japan in the 1990s, the Nikkei during its bear market experienced at least two 50% rallies, and several of around 30%.

The top two charts show the duration of previous US bear markets. The average and median duration is about 18 months, and the average decline is 42% (the S&P is currently 13.6% off its peak). What is so far missing for this current episode to turn into a major bear market is a US recession. Our recession signal currently sees a very small chance of a recession over the next few months, but this could rapidly change. We are closely watching, for instance, the number of US states with rising unemployment claims as an early warning sign (bottom-left chart). We also note that we have not yet had any long-term buy signals for US equities (last chart), which suggests that the worst is not yet behind us.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception