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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