Dow on Track for Correction, But Bear Market Still Distant

The Dow Jones Industrial Average (DJIA) is showing signs that it may be on track to enter a correction. Key indicators suggesting this include softer economic data, such as purchasing manager surveys, consumer sentiment, and homebuilders' sentiment, which have all weakened. For instance, the Composite PMI index has dropped from 54.6 six months ago to 51.6, and consumer sentiment has declined from 79.4 one year ago to 57.9. Additionally, policy uncertainty has risen sharply, with the Policy Uncertainty Index increasing from 123.9 one year ago to 313.3. These indicators suggest a weakening economic outlook, which historically has been associated with market corrections.

Historical data on market corrections shows that a correction is defined as a drop of 10%-19.9% from a recent high. The DJIA is currently more than 11% off its Feb. 19 high, which is in correction territory. This is consistent with historical data showing that market corrections are often preceded by weakening economic indicators and increased policy uncertainty. For example, the market correction in 2020 was preceded by a significant drop in consumer sentiment and increased policy uncertainty due to the COVID-19 pandemic. Similarly, the market correction in 2008 was preceded by a weakening economy and increased policy uncertainty due to the financial crisis. Therefore, the current indicators suggest that the DJIA may be on track to enter a correction, consistent with historical data on market corrections.



However, the current market sentiment that a bear market is still a ways off is influenced by several factors, which align with historical patterns of bear markets in various ways.

1. Economic Data and Market Performance:
- The "hard data" indicators, such as private sector jobs growth, unemployment rate, and retail sales, have shown stability or strength. For instance, the private sector jobs growth is at 129.7 thousand, up from 111.4 six months ago, and the unemployment rate is at 4.1%, slightly down from 4.2% six months ago. These indicators suggest that the real economic activity is holding up well, which is a positive sign that a bear market may not be imminent. Historically, bear markets have often been preceded by weakening economic data, so the current stability in these indicators supports the sentiment that a bear market is still a ways off.

2. Market Corrections and Recoveries:
- The S&P 500 is currently hovering near correction territory, down about 10% from its highs. Historically, corrections have often been followed by recoveries, and the market has shown resilience in the past. For example, the S&P 500 experienced a 35% drawdown during the COVID-19 pandemic but has since recovered. This historical pattern of recovery after corrections supports the current sentiment that a bear market may not be imminent.

3. Federal Reserve Policies:
- The Federal Reserve has left rates unchanged and signaled that their base case for tariff inflation is transitory. Futures markets are now pricing in two interest rate cuts this year and about a 50% chance of a third. Historically, interest rate cuts have often been followed by market recoveries, as lower interest rates can stimulate economic activity and boost stock prices. This aligns with the current sentiment that a bear market may not be imminent, as the Federal Reserve's policies are expected to support the market.

4. Market Cycles and Frequency of Bear Markets:
- Historically, bear markets have been less frequent since World War II, occurring about every 5.1 years on average. The last bear market ended in 2020, so it has been about 5 years since the last one. This aligns with the current sentiment that a bear market may not be imminent, as the market is not yet due for another one based on historical patterns.

5. Market Resilience and Recovery:
- Historically, bear markets have been short-lived, with an average length of 289 days, or about 9.6 months. This aligns with the current sentiment that a bear market may not be imminent, as the market has shown resilience in the past and has recovered quickly from bear markets.



In conclusion, while the DJIA may be on track to enter a correction, the current market sentiment suggests that a bear market is still a ways off. The stability in "hard data" indicators, the historical pattern of market recoveries after corrections, the Federal Reserve's policies, and the frequency and duration of bear markets all support this sentiment. However, investors should remain vigilant and monitor the economic indicators and market trends closely.