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Are U.S. Equities Headed Into A Bear Market?

Sunil Swami, Chief Investment Officer | SEP 10, 2015

This summer has been difficult for global stock markets, including the U.S., and we have read many analyst reports suggesting that the downturn in August was the first step in a broader cyclical bear market.  Most of these reports are from technical analysts who base their analyses on the market action leading to the top in May 2015 and the subsequent downturn, particularly in the month of August, when the Standard & Poor’s 500 index of stocks fell 6 percent.

At Alerus, we are not technical analysts but rather we look at market fundamentals.  The U.S. economy is growing at a 2.0-2.5 percent rate, both the manufacturing and service sectors are expanding, unemployment has fallen to 5.1 percent, and the yield curve is positively sloped.  This suggests that the U.S. economy is healthy, which should be good for stocks.  

However, global stocks face many headwinds – primarily a slowdown in the Chinese economy that has hurt the economies of its trading partners and has hit commodity prices.   Lower commodity prices have reduced earnings of companies that produce these commodities and industrial companies with substantial exposure to China.  Capital is flowing out of emerging markets.  The shale boom in the U.S. has led to a bear market in energy stocks.  U.S. stock market valuation is rich and its breadth has narrowed to healthcare, consumer discretionary, and Internet and social media companies.

Monetary policy in the U.S. has been tightening for some months and the Federal Reserve could be raising interest rates just as earnings growth in the U.S. is slowing if not declining.  While we cannot say for certain that we are headed into a bear market, we have taken precautionary steps by reducing risk in our client portfolios.

This article is provided for informational purposes only, is not intended as an offer or solicitation for the purchase or sale of any financial instruments and should not be relied upon as an investment recommendation. Alerus Financial, N.A. and its affiliate subsidiary companies make no representations or warranties as to the accuracy, completeness or timeliness of the information. The information is not intended to provide legal or tax advice. Individuals should consult a qualified legal or tax advisor for advice specific to their circumstances.

About the Author

Sunil Swami, Chief Investment Officer

Mr. Swami has decades of experience in the investment management and related fields.

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