A Callous, Persistent Bear

It really should’ve been worse. Or, if that’s too strong, we can say that it most assuredly could’ve been worse.

US equities notched a third weekly decline (the sixth in seven, but who’s counting?) and although most everyday market participants would probably express something like disappointment at the persistence of a bear market that’s engulfed virtually every asset class, this could’ve been the week the UK pension complex imploded in a systemic meltdown.

So, be grateful US shares escaped with a relatively pedestrian 3% decline. Still, it’s bad out there. In fact, the US benchmark’s 11.8% decline over three weeks is the largest since the original pandemic meltdown (figure below).

For context, the three-week stretch that culminated in the June lows was an 11.6% drop.

September isn’t usually kind to stocks, but last month was particularly callous. The S&P’s 9.2% drop counted as the worst September in 20 years.

US shares have notched monthly declines of at least 7% in three separate months in 2022. The last time that happened was 2008 (figure below).

There were only four instances in the post-War period of the benchmark falling 7% or more in at least three months during a calendar year. Since 1928, it’s only happened nine times. Incidentally, the S&P fell at least 7% in five out of six months following Lehman.

Q3 2022 also marked the third straight losing quarter for US shares. The last time that happened was during the financial crisis.

Given the ongoing malaise, it’s small wonder that gauges of sentiment are subdued. Goldman’s Sentiment Indicator registered -1.1 this week. The gauge tracks investor positioning across the 93% of the US equity market owned by institutional, retail and foreign investors. As the bank’s David Kostin observed, it was the 31st consecutive negative reading, the second-longest streak ever (figure below).

One more negative weekly reading and the current stretch will match March of 2016 for the worst streak in the gauge’s history. Note that Q1 2016 coincided with a mini-panic — the crescendo of a bearish, deflationary symphony that began six months previous with a botched overnight yuan devaluation from the PBoC.

“So far this year, the indicator has registered a positive reading just once,” Kostin remarked, noting that although a reading of -1 standard deviation or lower “has historically signaled tactical equity market upside,” it may be better to exercise caution given prevailing macro and policy realities.

“This signal has been outweighed this year by a progressively challenging macro environment,” Goldman went on to say, attributing the pervasive negative readings to ongoing and “sharp” cuts to institutional investor positioning.

According to Goldman’s prime desk, hedge fund net leverage is down 20 percentage points this year (figure above).

Mutual funds, Kostin wrote, have added to cash allocations “at the fastest clip since 2009.”


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One thought on “A Callous, Persistent Bear

  1. Hello, H. Thanks for the insightful and informative perspective, as always. It’s interesting that as time goes by with this economic cycle, I find myself experiencing a greater sense of patience and learning to abide with the US markets such as they are.

    What occupies me more is the coincident chaos in a changing world. China and Russia, as we used to say in the sixties, are “a trip.” In different ways, and without any influence or guidance from western countries, they are undermining their economies with their own decisions. Tell me that’s not the product of delusion!

    These international happenings keep my eyes glued to a computer and phone much more than this particular downward US economic cycle. Even though everything happening in the world right now inspires a level of trepidation and reason for concern, I also find it all a very interesting time in the history of our country and the world.

    My investment losses to date amidst the scale and gravity of the evolving US recession, foreboding and troubling though it may be, seem to be less a cause for worry than the vile abominations being carried out by Russia against peaceful and freedom-loving Ukrainians. There is no way the Russians can gloss-over the missiles they dropped on a convoy of vehicles carrying Ukrainian civilians near the southern city of Zaporizhzhia on Friday. Latest I heard was that 30 were killed and 100 injured. And this is not the first time the Russian government attacked Ukrainian civilians.

    The Russians do not make for themselves the reputation of a feasible partner in the world economy. Pure and simple, Russia is a pariah state, taking actions against all international norms. To say the least, right now the world is not in a normalized state. I am looking forward to seeing the resolution of this mess. The only question is the extent to which Russia will challenge the “world order” promoted by the west.

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