All the major U.S. indexes are already in correction mode. Whether they will enter the bear market largely depends on the state of the Chinese economy, which continues to be discouraging. The continuous drop in oil prices is also threatening to further drag the broader markets down. These factors have not only resulted in a bloodbath in the U.S. stock market this year but have also dented investor sentiment for some time now.
In such a scenario, where the stock market is not very reliable, it will be prudent to buy funds that apply market neutral equity strategies. These funds have little or no correlation with broader market downturns and volatility.
The Possibility of a Bear Market
A persistently downward trend followed by a price decline of 20% or more is generally accepted as a bear market. By this definition, we are heading toward a bear market ever since last year. Though the S&P 500 and the Dow haven’t entered into a bear market yet, they snapped a multi-year winning streak to end in negative territory in 2015. Moreover, in 2016, the S&P 500 and the Dow have plunged a respective 7.4% and 7.8% year to date.
Considering their drop from the highs, they are nearing a bear market. The S&P 500 is now 12.5% off its May 21 record high of 2,130.82 and would be in a bear market if it touches 1,706. The Dow has dropped around 13% from its May highs. It needs to fall to 14,681 to be in the bear zone.
However, almost 50% of the S&P 500 companies have fallen more than 20% from their 52-week highs this month. Additionally, companies having small market capitalization are already in a bear market territory. Small caps have fallen to a fresh two and a half year low during the second week of January.
Chinese Economy and Oil’s Decline Signal U.S. Slowdown
The stock market crash in China is the biggest warning sign of a bear market this year. Chinese stocks tanked about 40% from their June peaks, frightening investors worldwide. Chinese banks aren’t accepting stocks as warranty for loans, while bank loans in China declined drastically indicating investors’ lack of faith in Chinese markets.
China plunged into a bear market territory, while other nations throughout the world including United Kingdom, France, Germany and Japan also entered a bear market. This global meltdown is expected to have a significant negative impact on the U.S. economy. U.S. exporters aren’t the only ones to be affected; domestic commodity producers will feel the pain because of weak global demand and low commodity prices.
Similarly, the slump in global oil prices mostly due to lower demand in an already oversupplied market is also affecting the broader markets. BlackRock Chairman and CEO Larry Fink had said that oil prices could test the $25 per barrel mark and the stock market is anticipated to fall a further 10%, which will eventually ensure that the U.S. markets have entered the bear phase.
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