Understanding Market Bottoms

Investors seek to buy financial markets near a market bottom. However, since market environments rhyme instead of repeating, investors are generally paralyzed by fear as markets decline. It’s difficult to know if the market will bottom after it has declined 25%, 30%, or 50%. Enclosed is a historic framework and three useful metrics used to identify market bottoms

Source: Bloomberg

Market Bottom Characteristics

Formal Bear Market – A bear market is when a market has declined by 20%. Financial markets generally follow the business cycle, and recessions and declines in economic activity in general last between 6-12 months. The S&P 500, Nasdaq, and Russell are all still in bear markets.

Plunge in Consumer Confidence – Howard Marks once said that cheap prices and good news rarely come together. A historic datapoint is when Consumer Confidence has plummeted. However, you can extract a better bottom and buy signal for the upturn by looking at the ratio of expectations to current conditions. When people are miserable but think things will get better in the future, that is often historically indicative of market bottoms. We have yet to see a surge in this ratio.

Source: Bloomberg

Contracting Manufacturing Sector – Likewise, when it comes to the economy, bad news is often good news for the market. The ISM Purchasing Managers Index from the Institute for Supply Management is based on data compiled from purchasing and supply managers nationwide. When the ISM Index shows that manufacturing is contracting (a level below 50), the economy is usually in a slowdown. If it drops below 45, the slowdown most often ends in a recession, and that generally eventually leads to a buying opportunity in financial markets. The ISM Manufacturing PMI declined to 49 in November of 2022 from 50.2 in October.

Source: Bloomberg

Conclusions

The current bear market environment, while volatile has been relatively orderly, and has yet to show several historic signs of market bottoms. In addition to sentiment and ISM data, signficant VIX spikes and breakout by smaller cap equities have yet to materialize. Markets don’t repeat but ryhme, a plethora of historic market metrics imply this bear market will take more time.

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