A Looming Bear Market in Stocks? Don’t Bet on It
Protracted downturns largely occur when the economy lapses into recession, yet most economists don't see that happening until 2020, if then.
Market crashes are normal and happen all the time.
Photographer: Mark Thompson/Getty Images
The meltdown in stocks this week that saw the S&P 500 tumble 5.28 percent over the course of two days sparked an outpouring of views on how rising interest rates are bursting a bubble that drove equity prices to unrealistically high levels. Most of this so-called logic is hyperbole. Market corrections, as opposed to bear markets, happen all the time and this one is still within the range of normal volatility. Bear markets largely occur when the economy lapses into recession, yet most economists don't see that happening until 2020, if then.
Rising interest rates do hurt valuations, especially when valuations are high, but that's not the case currently. The S&P 500 Index trades at just over 13 times projected earnings, excluding the very expensive "FAANG" group of stocks consisting of Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google parent Alphabet Inc. The FAANGs account for about 10 percent of the weight of the S&P 500 and sport a multiple of 49 times next year’s earnings estimates. So when they run up sharply, they move the entire S&P 500, even if much of the rest of the market has remained little changed for 2018, becoming materially cheaper in the process.