Is the Bear Market Risk Fading? Here’s What I’m Watching

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Your fellow traveler,

Daniel

NEWS
What Happened This Week

• Respondents to the New York Fed’s Survey of Consumer Expectations expect 3% inflation 12 months from now, the same level they expected in January before tariffs were set in place.

• The same survey showed:

  • Unchanged expectations of 3% average inflation over 3 years, and 2.6% inflation over 5 years.

  • Improved expectations for household financial situations a year from now.

  • A broad-based decrease in the expectation of likely losing one’s job.

• Other surveys sh optimism in the markets: the AAII Investor Sentiment Survey and the Fear & Greed Index.

• While the economy added 147,000 jobs in June (above expectations), First Trust made an observation that things may not be quite as strong as they seem:

  • Jobs in government, education & health services, and leisure and hospitality are largely influenced by government spending and actions. A “core payroll” might be calculated to remove these three from the equation.

    • April core payroll growth: 30,000

    • May core payroll growth: 25,000

    • June core payroll growth: 3,000 (the smallest gains so far this year)

• On a positive note, the S&P 500 returns have broadened across more companies this year as compared with 2023 and 2024. This is typically a sign of real market growth in the middle of a bull market, rather than a bubble or euphoric state near the end.

How I See It

Despite the bittersweet job growth report, signs of an impending bear market appear to be declining.

As I stated two weeks ago, I don’t expect this year to be extraordinary. The risk of a bear market forming was greater just a couple months ago. But that risk appears to be declining based on a number of factors:

• The market regaining upward momentum.

• The S&P 500 value being above its 50-day and 200-day moving averages.

• The Shiller P/E ratio being high, but not unusually high for a bull market.

• The Purchasing Managers Index Composite PMI being above 50.

Weaknesses still exist, particularly leading indicators as measured by the Conference Board, as well as the weakness in “core payroll” as measured by First Trust.

But there will always be pockets of weakness even in bull markets.

My forecast remains that a 10% rise in the S&P 500 for the second half of the year would be the max I’d view as “healthy” growth. Anything more than that would concern me.

At the same time, I think a drop of 20% into bear market territory still remains uncomfortably higher than average, due to the volatility of government actions as well as weak readings of leading economic indicators.

For dynamic investors who enjoy the risk of managing based on forecasts, this could lend some support to managing with a more moderate or moderate-aggressive risk approach, rather than full stock exposure.

For strategic investors who are more risk averse, choosing and sticking with a long-term risk allocation means not trying to time the market and simply allowing the portfolio to do its work over the long run, based on the pre-determined level of risk.

The latter is the more likely to succeed, given statistics of passive versus active management. But still, it comes down to each individual’s desired level for risk and return.

In summary, I expect the second half of 2025 to be one of moderate growth, though likely with continued volatility similar. But managing risk is especially important this year as underlying economic weaknesses still need to be closely monitored.

Daniel Lancaster, CFA

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