While there are reasons to be bullish on global equities in 2018 and bear market risks are low, a correction is becoming increasingly likely, Goldman’s equity strategist Peter Oppenheimer writes in an overnight note, repeating our observation from Friday that this has been the strongest start for global equity markets in any year since the infamous 1987.

As Goldman notes, this “melt-up” has occurred despite the already strong returns last year. The S&P 500 had its second-highest risk-adjusted returns in more than 50 years and MSCI World ($) had its second-highest risk-adjusted returns since the index began in 1970. More concerning, at least for the risk-party folks, is that te year-to-date sharp rise in equity returns has also continued even as bond markets are experiencing sharp risk-adjusted losses.

Confirming that a major market move lower is likely imminent – something Bank of America cautioned on Friday – the Goldman Bull/bBar Market Risk Indicator is at elevated levels – in fact at the same level it was before the dot com and credit bubble crash – though, Goldman adds in an attempt to mitigate growing fears, “the continuation of low core inflation and easy monetary policy suggests a correction is more likely than a bear market.” And while monetary policy may be easy now, is getting tighter by the day…

In this context, and expecting the inevitable, Goldman writes that “drawdowns within bull markets of 10% or more are not uncommon” and points out that “there are many historical examples of corrections — drawdowns of 10-20% – – that are short-lived and do not turn into drawn-out bear markets associated with economic weakness.”

Of course, there are many drawdowns of 10% or more which turn into full blown recessions, if not a depression. GS defines a bear market as a drop of 20% or more.

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