Picture: ISTOCK
Picture: ISTOCK

Speculation has been rife, not just about whether US markets are nearing their next bear market, but about the potential knock-on effects on global economies. In the past, some investors even became famous  by predicting bear markets correctly (and profited from it). But, while we can make educated forecasts, it’s not an exact science.

To manage this potential risk, and provide its clients with the best advice possible, PSG Wealth constructed its own bear market risk indicator.

The model considers four broad areas: fundamental, technical, sentiment surveys and macroeconomic data sets. It’s also flexible to ensure that it adapts to market changes and that it base predictions on the latest data. In line with its investment philosophy, PSG Wealth focused on building the core of the model around fundamental and macroeconomic indicators.

The typical fundamental indicators PSG uses are:

  • Valuation of shares;
  • Corporate earnings; and
  • The number of initial public offerings.

The model also incorporates macroeconomic indicators such as:

  • The output gap in GDP;
  • Unemployment rate;
  • Inflation rates;
  • Yield curve risk factors; and
  • Job growth.

Key focus areas at the moment are the US yield curve and the US output gap (the difference between the potential and actual GDP). The output gap can be positive or negative. A continued outperformance gap can become unsustainable and dangerous.

The model shows that the employment rate in the US is almost at full capacity; based on history, this could introduce risks such as inflation. However, should the US be able to create more jobs in conjunction with job demand, it might keep inflation from reaching a high-risk area and hold a bear market at bay.


The findings, as illustrated by the graphs, show that the South African economy is much weaker than the US economy, but that company valuations in the US present a higher risk for the potential of a bear market. PSG Wealth will continue to monitor these indicators closely.

Bear and bull markets are a part of life. PSG Wealth focuses on managing the factors under its control and continue to weigh the impact of this indicator as part of a holistic approach to constructing robust portfolios.

By maintaining a diversified portfolio and focusing on the long term, rather than making poor investment decisions based on short-term market sentiment, investors can weather the impact of market cycles on their portfolios.

Make sure you select a professional with a proven track record of delivering consistently on investment objectives over time.

For more information visit www.psg.co.za.

Pask is the chief investment officer at PSG Multi-Management.

This article was paid for by PSG Wealth.