Two months ago we reported that according to Goldman’s bear market indicator, the risk of a market crash dead ahead was higher than before the dot-com bubble burst in 2000 and ahead of the 2008 global financial crisis, or as Goldman puts it, “our Bull/Bear market indicator is flashing red“.

Fast forward two months, and one market correction later, and Goldman’s mood has only gotten worse, not helped by the brutal market action of October, which saw many assets hitting a bear market, and the S&P falling on 16 of the 23 trading days while, collectively, equity markets across the world shed around $5tn of market cap.

To Goldman strategist Peter Oppenheimer, “the obvious question now is whether this has marked the start of a bear market more broadly, or if it is a less entrenched, albeit sharp, correction from which markets will quickly recover.” And, as he concedes, “things do not look encouraging” as three factors suggest that “equities could be about to enter a sustained bear market”:

Goldman tackles these key “bear market” risks one at a time, starting at the top:

1. The growth/inflation mix is turning against equity returns:

The problem here, stated simply, is that the global economy which had seen a significant boost from record loose financial conditions in 2017 and was further buoyed (particularly in the US) by the fiscal boost, is starting to lose momentum. Goldman economists’ 4Q estimate for growth has already slowed to 2.6%, well below the prior two quarters. Worse, looking ahead, as a result of the tightening of financial conditions and the prospects of diminishing support from fiscal policy is likely to result in the US economy slowing to a year-on-year rate of 1.75% by 4Q 2019.

As Exhibit 1 shows, the interest rate rises in the US economy over the past couple of years have been offset by very strong growth. As we move forward in time, the balance between growth and inflation deteriorates.

Coupled with tighter financial conditions, the impact of US trade tariffs and rising oil prices have slowed global growth momentum, Oppenheimer writes and shows in Exhibit 2 that there is a reasonable relationship between global growth momentum indicators such as PMIs and equity returns year over year. Exhibit 3 shows that there is also a close relationship between growth momentum and the performance of Cyclicals relative to Defensives. Interestingly, in both cases the market moves would seem to have overshot the existing macro data, suggesting that further growth deterioration has been priced to some extent