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Perspectives on the bear market – how long will sentiment languish at historic lows?

October 21, 2022

The FT Wilshire 5000 has experienced a technical bear market in 2022 (defined as at least a -20% drawdown)

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We examine the scale of the drawdown in the context of the 50-year history of the index and also look at return characteristics after reaching sentiment indicators lows.

Putting the 2022drawdown into 50-year context

Putting the 2022 drawdown into a historical context, Chart 1 shows FT Wilshire 5000 bear markets since the inception of the index in 1970, looking at the peak to trough move, as well the duration. As we can see the 2022’s bear market (so far) ranks as the seventh largest in history, and the fifth longest.

Chart 1: So far 2022 ranks as the fifth longest bear market in the FT Wilshire 5000’s history

Source: Wilshire. Data as of October 16, 2022

Sentiment indicators have reached levels last seen in the GFC of 2008-9

Chart 2 shows our US Composite Sentiment Indicator (CSI), which incorporates nine technical analysis and market breadth measures aiming to identify levels of exuberance and pessimism. As we can see, the CSI continues to languish around levels experienced during the GFC in 2008-9, when sentiment continued to remain at low levels for an extended period of time during the recession.

Chart 2: The US Composite Sentiment Indicator remains at extreme lows

Source: Wilshire, FactSet and Refinitiv. Data as of October 16, 2022

The pattern of subsequent market returns after reaching sentiment lows

Examining periods of statistically significant levels of low sentiment, Chart 3 shows that our US CSI has fallen below 2 (more than 1.5 standard deviations below the long-term average) thirteen times over the past fifteen years.  In the post GFC period, the US market has subsequently posted positive returns after the CSI falls below 2. However, we can observe this was not the case during the GFC, which was the last example of a prolonged recession.  

Chart 3: The returns delivered three months after hitting sentiment lows

Source: Wilshire, FactSet and Refinitiv. Data as of October 16, 2022

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US leads market recovery from the lows in mid-June after sentiment hit extreme lows

August 18, 2022

Following a record-breaking decline in the first half of 2022, markets have staged a recovery led by the US.

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The trough in June coincided with our US Composite Sentiment Indicator hitting, similar levels of pessimism seen during the midst of the Global Financial Crisis (GFC).

US relative performance almost back to December 2021 levels

Chart 1 shows the FT Wilshire 5000 index relative to the World ex US. After underperforming the World ex US index from the end of December through mid-June, the US has seen a big improvement in relative performance over the past two months. The recent period of outperformance has seen the US claw back most of the year-to-date underperformance, returning toward the peak levels seen at the end of 2021.

Chart 1: FT Wilshire 5000 relative to World ex US almost back to peak levels seen in December 2021

US market recovery coincides with Composite Sentiment Indicator hitting extreme lows

It was noteworthy that the rebound in the FT Wilshire5000 has coincided with sentiment hitting statistically significant levels. Chart 2 shows our US Composite Sentiment Indicator (CSI), which incorporates nine technical analysis and market breadth measures, and aims to identify levels of exuberance and pessimism. This has proven a useful market timing tool and contrarian indicator. The market rebound in June coincided with the US CSI hitting extreme levels of pessimism—over a 2.5 standard deviation move relative to a long-term average, and similar levels witnessed during the GFC. We can see that once these levels have been hit, the indicator does not stick around for long before moving higher. Should the market recovery continue, a key question will be when sentiment will approach overbought levels, at least in the short-term.

Chart 2: Our US Composite Sentiment Indicator hit extreme lows in June

Improving breadth within the US market

Looking at the breadth of the recent recovery in the markets, Chart 3 shows the percentage of stocks registering a Relative Strength Index (RSI) of over 70, which forms part of our Composite Sentiment Indicator and typically indicates an overbought signal for a stock or index. We show the latest readings versus the lows in June, as well as the five-year average level. The US has seen a fairly rapid rotation in sentiment, moving from 0% to around 16%, now at a similar reading to the peak levels we saw in December last year, and well above the five-year average. Conversely, using this measure of breadth the Chinese equity market has experienced a deterioration in sentiment over the same short period.  

Chart 3: The percentage of stocks registering an RSI of over 70 in the US has risen rapidly during the recovery

Source: Wilshire, Factset and Refinitiv, 10 August 2022

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