Via a Goldman Sachs note on the volatility in equities this week:
Could this turn into a bear market?
- This, in our view remains unlikely.
- Ultimately most bear markets are a function of recessionary fears as it is economic contractions that lead to profits falling. While our US economists have increased their probability of recession over the next 12 months by 1Opp to 25%, it remains a risk rather than a likely outcome and yesterday's ISM services print was strong (51.4 vs 51 expected and 48.8 prior) suggesting that a broad downturn is not imminent.
- At any rate, there is plenty of room for interest rates to fall to soften a continued bout of economic weakness and central banks are no longer constrained by the fear of high inflation. Very significant cash piles have built up and are sitting in money market funds that can be tapped to take advantage of lower stock prices. Furthermore, systemic risks remain controlled given that corporate and banks balance sheets remain healthy and can absorb the impact of weaker growth better than in many other downturns.
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A bear market is officially a 20% decline.
We are a long way from that right now. But, the day is young ;-)
Screenshot is a rough guide:
