This indicator suggests there's little chance of a bear market hitting global stocks this year

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Stocks around the world began 2018 as they ended 2017, rallying hard last week.

The MSCI All Country World Index (ACWI) — a measure of stock market returns from nearly 50 developed and developing markets — jumped by 2.66% to 526.686, leaving it at the highest level on record.

From the lows of early 2009, it’s now added a giddying 201%.


MSCI ACWI Weekly Chart. Source: Thomson Reuters

After such a stellar run, it’s understandable why some contrarian investors may be getting a little squeamish, especially at a time when major central banks have either started or about to start normalising monetary policy settings.

Yet, despite the prospect of tighter monetary policy globally, markets appear anything but concerned with many putting their faith in a stronger global economy to help propel corporate earnings — and therefore stocks — ever higher.

On the surface, the prospects for a bear market hitting stocks anytime soon — defined as a drop of 20% or more from peak to trough — appears to be close to non-existent.

It’s not just the majority of investors who think such a scenario is unlikely.

According to Citibank’s “Bear Market Checklist”, few of the indicators that predicted prior bear markets are flashing warning signs at present.

Here’s the checklist from Citi.

Source: Citibank

Those indicators in red are deemed to be “worrying”, according to Citi, while those in amber are seen as something to watch closely.

“Right now, only 3.5/18 factors are flashing sell compared to 17.5/18 in 2000 and 13/18 in 2007,” Citi says.

“As for the individual factors, global trailing and 12-month forward PEs [price-to-earnings] look a bit frothy, but the dividend yield and CAPE [Cyclically adjusted price-to-earnings ratio] still look reasonable.

“With bond yields low, the global equity risk premium (ERP) is still fairly high compared to history.”

As for other indicators, Citi has noted the historic importance of a flatter US yield curve given it has almost always acted as a lead indicator for recessions, moving this indicator to amber.

It also says its US sentiment indicator reached euphoria levels recently, something it now deems to be worrying. However, it says that other sentiment indicators such as stock analyst recommendations and fund flows remain benign, at least to this point.

Other indicators such as yield spreads and corporate behaviour also sit at levels that have not signaled imminent bear markets in the past.

Given the current metrics in the model, Citi says there’s little reason for near-term concern from long-term investors.

“It is not a market-timing model. It will not tell us that another short-term correction in global equities is imminent, but it will tell us what to do when that correction occurs,” it says.

“Right now, it is telling us to buy the next dip.”

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