The chart below, courtesy of Gluskin Sheff, covers the last 45 years and shows the 12-month change in the S&P500 Index, with the shaded areas indicating periods of recession.  All of the bear markets that occurred in this period (decline of greater than 20% in the annual change in S&P500) were associated with either a recession or a tightening of money conditions (i.e. higher interest rates) by the Federal Reserve.  The Fed has made it very well known that they will not be increasing interest rates for ‘an extended period’ of time and, even when they do start to raise rates, they will remain below levels defined as ‘normal’.   So we can safely assume that interest rate increases will not be the trigger for a bear market, not unless inflation suddenly comes back.

Recessions and/or Rising Interest Rates

The other potential trigger for a bear market would be a recession but, once again, we don’t see that on the horizon.  None of the typical early recession indicators are in place right now, including slowdowns in industrial production, real personal income, non-farm employment or retail sales.  While growth has slowed outside of the U.S., we still see the global economy expanding, just at a more reduced rate than prior expansions.

Recession Indicators Still Absent

More on China:  Gross domestic product in the world’s second-largest economy expanded 7.3 per cent in the third quarter from the same period a year earlier, its weakest performance since the first quarter of 2009, when growth was just 6.6 per cent.   But, unlike then, when the economy was in freefall as a result of the global financial crisis originating in the US, China’s growth problems this time are largely homegrown.  The latest quarterly reading means China’s economy this year is almost certain to register its slowest annual pace since 1990, when the country faced international sanctions in the wake of the 1989 Tiananmen Square massacre.  A correction in China’s property sector, the most important driver of the economy for much of the past decade, is the biggest drag on growth and most analysts expect things to get worse, given huge oversupply across the country.  Housing sales in China fell 8.9% over the first nine months of the year.  Vehicle sales also slowed down to a 4.6% annual growth rate.

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