5 Signs That a Bear Market Is Coming
With the S&P 500 sitting at an all-time high, it’s hard for many people to believe that a bear market could be coming. A correction of 5 percent? Sure! But a bear market — loosely defined as a 20 percent fall in stocks or more — seems to be out of the question.
However it is precisely during these periods when the market is most vulnerable — practically everybody who follows the market is bullish, and investors own stocks without hedges, and this means that there is simply no one left to turn bullish and buy. While such situations can last for long periods of time, there is a possibility that we could be very close to a bear market. Here are five reasons why.
1. Stocks are historically overvalued
The S&P 500 — as measured by the iShares S&P 500 Index Fund “IVV” — currently trades at over 22-times earnings and with a dividend yield of just 1.85 percent. Historically the average P/E ratio is closer to 12-15-times earnings and with a dividend yield of 4 to 5 percent. But this is just the “average.” When stocks correct, they go from being overvalued to undervalued. Historically stocks have bottomed with a P/E ratio of less than 10 and with a dividend yield of 6 to 8 percent.
We have seen stocks reach these levels or even lower at major market lows such as in 1932 and in the early 1980s. This value-level is so alien to modern investors that the majority of investors believe that the 2009 low was “the low.” But in fact we only hit the historical average valuation level in 2009, and ultimately I think that stocks can potentially sink lower.