Equity investors have been rudely awakened from their bullish slumber. Having risen 50 per cent over the two previous years without any meaningful setback, global equities fell 8 per cent in a week. Volatility has risen sharply, with the Vix index up fourfold. Tactical indicators were looking stretched in January, suggesting a correction was overdue, but now investors want to know what to do next. Is this just another bull market setback, or does it represent the beginning of something more sinister?
We have a checklist to answer this question. It is not a market timing tool. It will not predict corrections, but it does help us think about what to do when they come along. Right now, still only four of the 18 “Bear Market” factors we watch are flashing red. Sure, valuations don’t look especially attractive and US corporate balance sheets are increasingly stretched, but other factors are less worrying.
Companies are still fairly cautious — capex, M&A and IPOs remain subdued. At the top of a proper bull market, chief executives get sucked in as well. Equity fund inflows are picking up but still low compared with previous market peaks. Overall, we think that a second consecutive year of synchronised profit growth should be enough to push global indices to new highs. The dip we’ve had is one you should buy.