A bear market bottom has historically been marked by several economic and market signposts, including depressed investor sentiment, widening credit spreads and a policy response to the systemic shock facing the country. More importantly, as we try to identify when we might hit a bottom in the ongoing bear market we see several signs that we are very close, with a key caveat being the uncertainty caused by COVID-19 might overwhelm the meaningful fiscal policy response we think is imminent. With that written, below is the Brinker Capital Bear Market Bottom Checklist. History may not repeat, but we do believe it rhymes, and right now there is so much bad news priced into the market we think we can all begin feeling just a bit optimistic.
Investor sentiment, not there yet: investor sentiment has almost reached an extreme bearish point, with the number of bears nearly outnumbering the number of bulls in one investor survey
Volatility, yes: market volatility has reached an extreme level, with the VIX (also known as Wall Street’s “Fear Index”) hitting an all-time high of 85
Credit spreads, not there yet: high-yield spreads have widened meaningfully, but not yet reached levels seen in 2008/2009; the widening of spreads represents a level of fear commensurate with a bear market bottom
Yield curve, yes: the US Yield Curve has steepened dramatically over the past few weeks; the steepening of the curve has historically taken place at a bear market bottom
Peak to trough correction, yes: the S&P 500 Index is off 32%, a correction that is a bit greater than the average drawdown during the 11 bear markets since 1946
Fund flow data, yes: over the past four weeks $17 billion ($204 billion annualized) has come out of US equity mutual funds; indiscriminate selling has taken place at prior bear market bottoms
Market structure, not there yet: Near a bottom, we see a contraction in the number of stocks making new lows, even while the market continues to make new lows. We see some progress on that front but need to see the dynamic persist (Strategas).
Policy response, not there yet: Historically, it has taken a significant policy response to put a floor under investor sentiment and risk assets. To date, we have seen a massive monetary policy response to the market selloff and economic uncertainty created by COVID-19; what we are waiting on is a meaningful US fiscal policy response to the economic crisis facing the country.