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Grizzly bears vs gummy bears

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Grizzly bears vs gummy bears.

Carmel Fisher discusses a Credit Suisse Securities research paper

Along with talk of economic slowdowns and recession, the chorus of forecasters predicting a global bear market has reached a crescendo in recent weeks. A bear market is defined as a 20% fall from peak levels, and in January several major share markets fell into bear market territory, at least temporarily. A bear market is the opposite of a bull market, with both labels based on the way the animals attack; a bull thrusts its horns up into the air while a bear swipes its paws down.

We found a Credit Suisse research paper more interesting than many of the bear market calls that we've seen of late. It noted Australia has endured twelve bear markets in the last 40 years and so far this year, is one of the few markets yet to enter bear market territory.

After analysing previous cycles, the authors identified a pattern in which Australian bear markets evolve into one of two types following the initial 20% fall. A Gummy Bear occurs when stock indices rally over the next 12 months (gaining on average 24%) whereas a Grizzly Bear evolves when prices fall further over the following twelve months (with an additional 20% loss on average). Grizzly Bears are generally associated with deep profit recessions and high starting valuations, whereas Gummy Bears are your garden variety bear markets!

Credit Suisse believes, based on their earnings forecasts and current market valuation levels, that if the Australian share market falls into a bear market this year, it will be a Gummy Bear. The firm is forecasting flat earnings per share — no growth, but no decline either — and believes that Australian company valuations are reasonable relative to their historic levels.

It looks as if volatility is here to stay, and the Australian share market may well dip into bear market territory. It is nevertheless comforting to know what sort of bear we might encounter in the months ahead.

 

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