Despite the recent decline in U.S. equities, a bear market is probably not on the horizon, says National Bank Financial Inc. (NBF).
In a new report, the firm suggested that the economic fundamentals aren’t pointing to major market weakness at the moment.
Severe geopolitical events, such as war in Ukraine or a worsening of the pandemic, could push the markets into bear territory — defined as a drop of more than 20% — it allowed.
However, the prospect of rate hikes doesn’t currently pose a threat to U.S. stock prices or corporate earnings, it said.
“One way to assess the impending danger to stocks is to look at the yield curve,” it said, noting that the current yield curve — defined as the difference between the yield on 10-year and 3-month Treasury bills — is still quite steep.
“The slope of the yield curve is currently about 158 basis points, which is still relatively high by historical standards,” the report said.
There has never been a bear market when the yield curve is above 50 basis points, it added.
“Our research has shown that as long as the [yield curve] remains above 100 basis points during the mature phase of the business cycle — which is where we are now — equity markets tend to advance despite increased volatility,” it said.
“At this point, a buy-the-dip strategy seems more appropriate than one that sells on strength,” the report concluded.