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"We are in a bear market," Morgan Stanley equity strategist Michael Wilson said in a report to his clients on Monday.
"Although 2018 is clearly not a year of recession, the market is saying that bad news will come," Wilson said, skeptical about the market for months.
40% of the S & P 500 index is already in a bear market
But under the hood, the bull market seems besieged. Morgan Stanley noted that more than 40% of S & P 500 shares have lost at least 20%.
Significantly, the stock market is no longer rebounding. In 2018, the S & P 500 Index posted a slight decline on average on days when the previous weekly return was negative, according to Morgan Stanley. This has not happened since 2002.
"The only years that Buy the Dip did not work were during bear markets, or the beginning of one," Wilson wrote.
Investors also underestimated stocks even after companies posted better-than-expected results. This is not a healthy sign.
"In our opinion, when stocks are selling well, it's a bear market," Wilson wrote.
Goldman Sachs: Buy stocks
Of course, many on Wall Street believe that it is only a slight correction, as the markets are adapting to a slower growth environment. The US economy continues to outperform the rest of the world. And corporate profits should grow strongly next year, even if their pace is slower.
Goldman Sachs continues to urge its customers to buy US stocks, although the Wall Street firm estimates that domestic GDP growth will slow to 2.5% in 2019 and 1.6% in 2020.
David Kostin, the chief US equity strategist at Goldman Sachs, wrote in a report released Friday night that the S & P 500 would likely end at 2,850 this year. That's almost 6% more than the current level.
Neuberger Berman reminded his clients on Monday that market corrections had rarely been transformed into a bear market without a recession within 12 months.
"Volatility is not the same as a sustained bear market," wrote Erik Knutzen, director of the company's multi-asset investments.
Not a repeat of 2008
The good news is that even the bears are not clamoring for a recovery from the collapse of 2008-2009 that has erased more than half of the value of the S & P 500.
On Monday, Wilson said that there was probably a "limited" downside risk for the S & P 500 because valuations had already dropped significantly. And it also helps hedge funds and other active investors to significantly reduce risk.
Wilson nonetheless urged his clients not to be trapped by the fugitive rebounds of the market.
"It's a bear market," he wrote, "and should be traded as such – that is, selling rallies rather than buying troughs."
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