Goldman Sachs' 'bear market' indicator warns of zero returns - CNBC

As reported by CNBC, Goldman Sachs' in-house tool for bear-market conditions is beginning to flash warning signs, cautioning that markets could be looking at zero returns over the next 12 months.

Key highlights

Goldman Sachs's bear market prediction tool is at an "elevated" level that has historically signaled a zero average return over the next 12 months and a "substantial" risk of drawdown.

Goldman's bear market indicator — which takes into account the unemployment rate, manufacturing data, core inflation, the term structure of the yield curve and stock valuation based on the Shiller PE ratio — is at a rare 73 percent, its highest level since the late 1960s and early 1970s.

The indicator is "flashing red," wrote Goldman chief global equity strategist Peter Oppenheimer. "Historically, when the Indicator rises above 60 percent it is a good signal to investors to turn cautious, or at the very least recognize that a correction followed by a rally is more likely to be followed by a bear market than when these indicators are low."

But while the Goldman indicator may be suggesting tougher times ahead, Oppenheimer said there many be reason not to jump to conclusions about an upcoming bear market.

"There remain good reasons why this indicator has been consistent with a sharp correction rather than the start of a prolonged bear market," he wrote. "We continue to expect a sustained period of low returns rather than a sustained bear market."