Bear Repair: Where Is The Stock Market Headed Next?

September 20, 2022

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A few months ago, we shared Goldman Sachs’ Chief Global Equity Strategist Peter Oppenheimer’s understanding of the market cycle and its four recurring phases:

Understanding the cyclical nature of the equity market can help investors make rational decisions – and stay calm – even when the economy is volatile. Which is helpful intel as you’ve probably noticed that the markets have been on quite a ride lately.

Good news: Historically, markets have bounced back. And recently, Oppenheimer and his research team dove into the history of how the despair of bear markets tends to transition into the hope of early-stage bull markets and what they’re expecting this time around. (Here is the original version of their article on bear markets.)

Is it a bear, a bull or CGI?

Here’s some dinner party trivia: Not all bear markets are the same. Depending on what triggers a bear market, they can be severe or mild, long or short, and the recovery can be quick or gradual.

Our collegues think that the current bear market appears to be cyclical, that is, driven by factors like rising interest rates, profit declines and recession chatter. This type of market historically lasts two years on average and takes about five years to fully rebound to its starting point. The two other types of bear markets are:

1) Structural, bear markets that stem from financial bubbles or structural imbalances.

2) Event-driven bear markets which are triggered by a one-off shock. Think: the 2020 slump from the pandemic.

Most bear markets, regardless of type, tend to end with a similar powerful initial rebound – a bang – that our colleagues describe as the hope phase of the market cycle.

Unfortunately, it can be hard to tell the difference between a temporary bear market rally and a genuine transition into hope while they are happening. They may both look like a bull, sound like a bull and feel like a bull…at least at first.

Signs that point to change

One key sign we’re approaching a market recovery? Low company valuations. Alone, they aren’t enough to tell us the tides are definitely turning, but they are a critical factor. Other signs include a slowdown in bad news and/or a peak in inflation and interest rates.

Our Goldman Sachs Research colleagues have also developed two proprietary indicators to help pin down the turning point from bear to bull.

When our Bull/Bear Market indicator and Risk Appetite indicator are both close to their limits, it’s a strong sign that we’ve gone as far in one direction as we’re likely to go and change is imminent. But current levels of these indicators suggest we haven’t reached a turning point yet.

So what happens next? Something has to give. Either returns stay low and volatile for a long time or the market plunges further from its current lows to set a new, genuine bottom from which to rise.

What’s on the horizon?

If not all bears are grizzlies, not all bulls are Bushwacker. Bull markets can also vary in length and strength, depending on what’s going on with the economy.

Our colleagues expect the next bull market cycle to be fatter and flatter than the previous one. A fat and flat market means one that fluctuates up and down over a relatively wide price range. (One that fluctuates over a narrower range is known as skinny and flat.)

The last bull market (1982-2022) offered high real (adjusted for inflation) returns powered by rising company valuations. It was driven by:

Disinflation - Dropping inflation and interest rates
De-regulation - Supply-side reforms and lower taxes
De-escalation - Lower geopolitical risk after the collapse of the Soviet Union and emergence of US dominance
Globalization - Entry of India and China into the World Trade Organization
Digitization - Rise of the digital economy
Monetization - Emergence of zero interest rates and quantitative easing

The next bull market is likely to look a lot different, as some of these drivers reverse course. Our research team expects the next hope cycle to be focused on:

Lower aggregate returns (a flatter market)
More government intervention
Greater regionalization
More infrastructure spending
Investments in corporate efficiency (both energy efficiency and labor productivity)

So even if this market feels a little uncomfortable, history suggests we sit tight and keep the worrying to a minimum because no part of the cycle lasts forever – it’s likely that bears will eventually sleep and bulls will run once more.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this website were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. This article is not a product of Goldman Sachs Global Investment Research. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.