Since hitting the trough of the Great Recession more than nine years ago, the stock market has done quite well. Over that time, the 122-year-old Dow Jones Industrial Average and S&P 500 more than quadrupled from their lows, with the tech-heavy Nasdaq Composite more than quintupling from its low. If you invested in a diversified set of high-growth stocks since March 2009 and hung on for the ride, you've probably done quite well.
But this isn't to say that the stock market hasn't had its fair share of hiccups over this time. It nearly fell into a bear market in 2011, and it's undergone a handful of corrections -- dips of at least 10% from a recent high -- over the past couple of years.
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The thing is, we as investors know that economic contractions, recessions, and bear markets for stocks are inevitable. It's not a matter of if they'll occur, so much as when. And while no investor can consistently and accurately predict when a bear market will occur, how steep the drop will be, or even what'll eventually cause the market to tumble, there are some telltale signs to suggest we're entering an environment with increasing negativity. In other words, it might be time to become a stock market bear.
Here are 10 reasons to believe that being bearish on the stock market right now is the right move.
1. The trade war is adversely impacting manufacturing companies
To begin with, there's no easy fix for the escalating trade war between the U.S. and China. President Trump is adamant that imposing tariffs on Chinese goods will coerce the American public to buy U.S. products. However, we've already seen a slew of manufacturing companies warn that higher prices for aluminum and steel are increasing their material costs. Appliance giant Whirlpool was forced to reduce its full-year profit outlook and pass along price hikes to consumers as a result of the ongoing trade war.
2. We're probably witnessing peak employment
Sometimes it's possible to have too much of a good thing. If we look back at the U.S. unemployment rate, we're currently sitting at a roughly 49-year low. Over the past five decades, the unemployment rate has spent very little time consistently below 4% for a variety of reasons. This suggests we're probably nearing a point where unemployment will reverse course and begin heading higher. It's unclear how the market would take such an event, but my suspicion is it wouldn't be taken well.
To boot, having more job openings than unemployed workers seeking a job has given more wage power to workers than they've seen in a long time. This is creating the strongest wage growth we've witnessed in a decade. However, that's not such great news, as you'll see in the next point.
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3. Interest rates are on the rise
Building on the previous point, the Federal Reserve has had no choice but to "stay on the gas pedal" when it comes to raising interest rates. U.S. GDP growth in the second quarter came in at its highest level since 2014. And, as noted, workers are experiencing their fastest pace of wage growth in about a decade. If left unchecked, this could lead to an economy where inflation levels get out of hand. In short, you can expect interest rates to continue rising, which should put a damper on corporate lending.
4. The housing market is sending frightening signals
Next, we're really beginning to see a serious slump in the housing market in Southern California. According to data from CoreLogic, the number of new and existing home and condominium sales in the region declined 18% in September 2018 compared to the previous year. This represents the slowest September for home sales in Southern California in 11 years, which is when the housing crisis began.
To be clear, this in no way suggests that a housing crisis is coming. But a steady decline in home sales in arguably the most-watched market in the country, compounded with rising home prices in the region, does imply that a supply glut could soon hit. If that happens, it would spell bad news for the financial sector of the market.
5. The yield curve is flattening
Another reason to worry has been the flattening of the yield curve. We're talking about the yield difference between short- and long-term U.S. Treasury bonds. In a perfect world, bonds with longer maturities will have higher yields than those with shorter maturities. A flattening yield curve describes an event where the gap between long- and short-term rates shrinks. It can sometime even reverse, an event that has preceded pretty much all modern-day recessions.
What does this mean for investors? Simple: When the yield curve has a wide gap between short- and long-term yields, it encourages banks to lend, because lending at long-term rates and borrowing via short-term rates is very profitable. When this gap shrinks, banks aren't enticed to lend, which can slow economic growth.
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6. A split Congress throws additional stimulus out the window
Although the stock market responded positively following last week's midterm elections, I don't believe investors are viewing the bigger picture. Putting aside the fact that the market has historically performed better following midterms with a Republican in the White House and a split Congress, the divided Congress pretty much eliminates any chance of further economic stimulus. There's no chance that a Democrat-run House is going to pass further tax cuts by President Trump, and healthcare reform is all but off the table. Essentially, it's up to stimulus from the Tax Cuts and Jobs Act to do all the heavy lifting in the near term, and frankly, that's asking a lot.
7. Credit-card delinquencies have been on the rise
Even though we're a nation of consumers -- approximately 70% of U.S. GDP is based on consumption -- there comes a point where (and stop me if you've heard this before) you get too much of a good thing.
In recent years, we've witnessed the average debt per cardholder, and the number of outstanding credit cards, rise, according to a report from credit-reporting agency TransUnion. Most notably, the percentage of accounts that were 90 or more days delinquent has risen from 1.48% in 2014 to 1.87% in 2017. As interest rates on variable-rate credit cards rise, it could become increasingly tougher for consumers to meet their payment obligations.
8. The FANG stocks are proving fallible
After being untouchable by pessimists for years, investors have also seen weakness crop up in the FANG stocks -- that's Facebook, Amazon.com, Netflix, and Google, which is now part of Alphabet. Amazon's cautious holiday sales forecast and Facebook's recent security and growth concerns have Wall Street worried about a group of stocks at which folks haven't batted an eye for years.
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9. Corporations are signaling caution
Though subtle, it could easily be argued that the way corporations are putting their money to work signals that trouble lies ahead.
The Tax Cuts and Jobs Act cut the peak corporate income tax rate from 35% to 21%, giving corporations a windfall of income that President Trump assumed would be used for job creation, wage increases, reinvestment, and acquisitions. However, a good chunk of this extra capital has been used to repurchase shares of common stock and, in some cases, increase shareholder dividends. While buying back stock should boost earnings per share and may make stocks look more fundamentally attractive in the near term, it speaks volumes that businesses don't see a better use of their capital at the moment.
10. History says we're overdue for a sizable correction
Lastly, since Wall Street pundits love to lean on history so much, let's do the same. History suggests that stock market corrections are perfectly normal, and we're long overdue for a normal, but substantive, move to the downside. We're currently riding the second-longest economic expansion of the past 161 years, which would imply that we're more likely to be near the end of the existing economic expansion than in the middle of it.
Still, bear markets are a good thing for investors. Since the stock market tends to rise over the long run, bear markets give investors a chance to go "shopping on the cheap," so to speak. Thus, even with quite a few telltale signs that a bear market could be around the corner, this is actually a very exciting time to be an investor.
