Macroscope | The next bear market is coming, but it should be less fierce than the last downturn

Tai Hui says the global economy is showing decent momentum, and the US economy has become more stable. The next recession is more likely to resemble the mild ones of 1990 and 2001 than the 2008 monster

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A baby polar bear looks around a zoo enclosure in Germany. Eight of the last 10 bear markets in the US were associated with recessions. The next one should not be catastrophic, given the current economic climate. Photo: EPA

Published: 10:15am, 28 Sep 2018Updated: 11:04pm, 28 Sep 2018

This month marks the 10th anniversary of the collapse of Lehman Brothers, the event that turned turmoil in the United States housing market into the global financial crisis. A decade on, people are naturally wondering how long it will be before the next equity bear market.

Investors are growing increasingly mindful of just when the US economic growth cycle will end. While the relationship between bear markets and recessions is not perfect, eight of the last 10 bear markets in the US were associated with recessions.

Given that the Hong Kong market is highly correlated with the US market, it would be difficult for the region to decouple from the US when the downturn comes. Since 1990, 73 per cent of the monthly returns for the S&P 500 and the Hang Seng Index have moved in the same direction, whether up or down. On a more positive note, market downturns are usually shorter than upturns.

Precisely predicting market downturns and recessions is notoriously difficult. Since the current US economic growth cycle is already the second longest on record, some investors think the end must be near. However, comparing the length of the cycle with the averages tells you little about the durability of the current cycle.

Financial conditions in the US remain accommodative. Real interest rates remain low by historical standards, and the real yield on the US 10-year Treasury, at 0.5 per cent, is well below the long-term average of 2 per cent. In six of the last eight US recessions, the real yield on the 10-year Treasury breached 2 per cent in the lead-up to an economic decline. The current interest rates are still favourable for debt servicing and should stay this way for the next 12-18 months.

.css-1m2rp1p{color:#34b8b5;}Macroscope | The next bear market is coming, but it should be less fierce than the last downturn

Macroscope | The next bear market is coming, but it should be less fierce than the last downturn