Here Comes the Bear Market

Wall Street was bound to notice sooner or later that the economy is unwell. Now it has.

The Dow and Nasdaq indexes both closed Friday in correction territory—a market dip of 10 percent from the last peak—and the S&P 500 wasn’t far behind. We’re now likely headed into a bear market, which is a dip of 20 percent. Probably we’d be there already if the market didn’t build into its calculations that President Donald Trump will reverse himself on Iran to prop up stock prices, a doctrine known as TACO (for “Trump always chickens out”).

Before we proceed, a disclaimer. I am not a stock market expert. My views on the market are entirely second-hand—a distillation of what the business press is saying at any given moment. I believed last October that a stock market crash was imminent. That was obviously wrong (as my broker has lately been reminding me). But the signposts haven’t exactly got better since then. Warren Buffett has an indicator for stock overvaluation: market capitalization divided by gross domestic product. Buffett says that when his indicator nears 200 percent, which is to say when stock prices are twice as great as the economy, investors are “playing with fire.” The Buffett indicator was 218 percent when I wrote last fall. It’s 213 percent now.

Then there’s the more intangible cockroach index. Speaking in mid-October about signs of instability in private credit and private equity, a sector that goes largely unregulated, JPMorganChase’s chief executive, Jamie Dimon, said: “When you see one cockroach, there are probably more.” Five months later, private credit’s exposure to software companies........

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