Richard Bernstein: 3 Signs to Watch for the Next Bear Market

Richard Bernstein has been very bullish over the last few years and very right. I’m biased towards his research because I was a big fan back during my other life at Merrill Lynch, but even my less biased half still thinks he’s a very good analyst (in other words, that’s my full biased self telling you he’s good).

Anyhow, he has a nice piece of research out that’s providing a very optimistic view of the economy.  In particular, he notes that none of the classic signs leading to a bear market are presently in place.  He’s worth listening to on this one because I specifically remember his constant warnings of a profits recession during the housing bubble.

Here’s his commentary:

“There are three classic signs that have historically strongly suggested that a bear market might be nearing. None of those three signs are evident today in the US. These signs are:

• The Fed tightens too much – historically bull markets didn’t end when the Fed started to tighten. Rather, they ended after the Fed tightened too much. A classic indicator that the Fed has tightened too much is an inverted yield curve (i.e., short-term rates higher than long-term rates). The Fed has indicated that they do not anticipate tightening anytime soon, and an inverted yield curve seems years away.

• Significant overvaluation – Our valuation models continue to suggest that the market is significantly undervalued despite the four-year bull market. More important though is the high level of uncertainty among investors. Uncertainty, according to classic financial theory, indicates undervaluation. Markets tend to be overvalued when investors are certain, and undervalued when investors are uncertain. In fact, this is a financial tautology. Most investors would agree that there is great uncertainty surrounding the US equity market. Therefore, the US market must be undervalued.

• Euphoria/Asset class of choice – It is hard to argue that US equities are the asset class of choice when Wall Street strategists are recommending a historically low equity allocation, pension funds have very low equity allocations relative to history, and US equity mutual funds were, until very recently, experiencing net outflows.

These signs are increasingly evident in the emerging markets and, as usual, investors don’t believe the signals apply. However, these signals do not appear within the US equity market. It is somewhat ironic that investors are enamored with the emerging markets despite that those markets are showing the typical signs of risk, but feel the US market is too risky even though the risk signals might be years away.”

Source: RBA


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Boston Larry

    Thanks for this Bernstein article. I used to be a fan of his, and I wish I had kept it up. I’m one of very many who have been a skeptic and have been underweight equities during the past year. Equities keep climbing the wall of worry and uncertainty. Meanwhile, the USA is the new Saudi Arabia of natural gas, and trending that way in oil production. With lower energy costs than our competitors, our manufacturing is growing. I see that industrials and financials are the two sectors leading this market. I find it hard to trust financials after the 2008 experience.

  • Alberto

    Please don’t buy EM stocks, currencies and bonds, please don’t move your money outside your beloved country. The US are going to be energy independent again, gasoline will drop, please stay here, don’t move your money in those horrible markets where we (US and European banks) are no more a factor, no more the leader in credit, no more your beloved servant. Beware of those barbarians !

  • Conventional Wisdumb


    Just curious given the ZIRP policy, do we have a positive slope because of it or in its absence would we have a flatter curve?

    I recall reading something where Greenspan was puzzled by the fact that tightening on the short end led to yield compression rather than status quo spread sometime after 2005, I think. He considered it a enigma.

    Do you have any thoughts on whether you think we will get inversion if rates start to rise?

    Thank you.

  • perpetual neophyte

    I literally just read that report today. My criticism of the report itself is that it read like an op-ed piece – a great narrative light on data definition or citation.

    For example, he writes: “Investors did not fully embrace the 1980s bull market until several years after it began. Institutional investors did not fully appreciate the opportunities in equities until late-1985/early-1986 when oil prices collapsed, and it became clear that inflation was not going to constrain equity returns.” But how is any of that being defined and where can I verify it with numbers, not just his anecdotal recollections?

    From a contrarian perspective, he mentions retail investors piling in to equities after an eye-popping January in 1987, just prior to the October ’87 crash.

    If I recall correctly, the most recent reverse of flows for equity funds was during or after the big January 2013 number…

  • Cullen Roche

    Long rates are an extension of short rates. So, odds are, if the Fed is keeping rates very low, then the market will feel similarly at the long-end.

  • KB

    Good signs to determine the bear market coming, yet, I am afraid, if we wait for them under current circumstances, we would miss the coming bear badly.

    Fed tightening – i think there is no chance of it – too much currently would be any tightening.

    Significant overvaluation? Excellent term, but significant by how much? What should we use, forward, or 10Y normalized??? Should it be one or two sd above the mean? By some measurements the market is significantly overvalued right now, by some other – fairly valued…

    Euphoria…. Please, just stop blabbing that people are pessimistic. Really, all bullish opinions indicators are at their highs! All assets, exept equities, are unloved and critisized. Only ECRI and Hussman remain pessimist, and even ECRI is not bearish on equities!

    That’s what we have. What conclusion can be drawn from these signs? None! I am afraid we would need some other set of signs to detect the bear.

  • Joshua Wojnilower

    If the Fed tightening too much is necessary to end a bull market, than obviously the Fed should never tighten and the bull market will continue forever. That’s obviously being sarcastic, but I think one has to recognize the Fed’s actions currently are very different from the recent past. The Fed may not move interest rates higher for several years, but that doesn’t mean the US can’t experience a recession or profit recession (which is already occurring). Furthermore, a brief look at other countries would show that the Eurozone, UK, and Japan have all recently experienced recessions and bear markets despite central banks not raising interest rates.

    One another point, Bernstein’s comparison ignores the P/E valuation of stocks at the start of the 1980’s versus today, which is very different.

  • Geoff

    CW, you’re right. In 2005, the Fed hiked short rates but long rates refused to budge much. The market clearly saw the financial crisis coming well before the Fed did.

    But this time, the financial system and households are in much better shape to handle a rise in short rates. Therefore, long rates are likely to follow suit.

  • G-

    Personally, I think the biggest difference between now and “hints of bear market- The Fed tightens too much” is the Fed has pretty much been the sole reason why we are here. Every time they have stopped qe-we have dropped like a rock. NOT tighten, just stop injecting-and we dropped.

    So it is hard to believe that the SECOND Ben actually does his first round of tightening-EVERY fund manager in the world is going to start front running the “whatever trillion” they are holding and have to unwind–and all hell breaks lose. The Fed has cornered themselves into the “we will never let this market down-and we will leave rates low-back bone” So the minute the street sees that safety is not there-I am not sure what will stop the massive amounts of sell orders. I just see the street waiting for the fed to tighten too much to run like heck out of this will be the first one.

    Maybe I have it all wrong-but we saw how the markets reacted when they just stopped purchasing. I can’t imagine what they do if they start unwinding.

  • Johnny Evers

    A lot of times in this business we don’t understand cause and effect.
    Let’s look at the pattern of the Fed raising rates and the market going down, and vice versa, for example.
    Well, the Fed usually raises rates when the economy is going great guns and it lowers rates when the economy is in a slump. And then when the economy regresses to the mean, the Fed takes credit.
    In reality, if the Fed chairman threw a lobbyist into a volcano when the economy was in a slump, six months later he’d be taking credit for ending the recession.

  • Anonymous

    A crash is coming

  • Andrew P


  • Mr. P

    Does anyone remember Bernstein’s position/forecast was in 2007?

  • hope

    To raise the interest rate now is only lining the pockets. Just like the tax collectors in the bible. Lots of collecting, less wisdom. What we could use now is a blessed one like Matthew. Once a tax collector ,until
    He became a apostle. Stop gambling with the our means,once we show our
    (In God we trust,let the wisdom guide use God gives use hope this country was very blessed in it’s very start. We are finding our selves with less. Only the banker know how many people are with out funds. If you are one of those who are seeing people standing in line told sorry you’re bank card said insufficent fund.raising rates doesn’t help. It’s like a clean sweep and to bad you’re out.Not the USA I was born and raised in.Follow the money trail.

  • hope

    The stakes are too high % rates going up is bad medicine.
    Americans are suffering and children are suffering,inflation.
    Once the businesses go belly up where are the employed going to are
    The elderly the mentally handicapped going to make ends meet. oh sure the elderly and simple minded can live with family. That’s not always the case, siblings, parents .It feels like the rise in cost of food is to stop the fat . The rise in mainly prepared foods is what i have found not in the cost of raw good’s . Taco bell tastes way better than my taco’s. Most of us have work to be done. Learning to cook is only going to stop me from getting out there and walking the fat off. there for taxing me for soda and drive up taco’s. is counter praductive in the war on fat.I’ve found when we were all young, we all get this idea that moving around isn’t cool any more . That’s when it starts So let us all get out. Telephones are really the epidemic of obesity it will take some time , but once the inactivity kicks in the cell phone junkies will get fat . just a matter of time . Kiss the matabolisome good by. Most will find once the moters inactive it can take a bit to get it going againe. That would be fine if it were the mower. the neibors would have to rally together about what to do about ya if ya ran the mower up and down the side walk in the off season.Why war when theres work to be done. I really think those who are at the helm are letting the elderly down . Its time for those steeling from fund’s anser for it time for congress to dig up the dirt no matter what side of the line.Who belives that steeling from our elders is right? There getting screwed in this econemy. I speek of the hard working retired the once who had socialsecurity withdrawn from there checks. people will not be blessed if they don’t do what they know to be true.