To understand how and when stock prices are likely to drop, it is informative to consider how they got to current nosebleed heights.
The biggest class of holders of stocks are institutions such as pension funds. These funds also have large holdings of treasury bonds. They are not interested in speculating, security of assets is their number one concern. However, they do have specific targets for annual growth rates which must be met. When interest rates on bonds drop by a lot, the annual growth target cannot be met by holding bonds so the fund managers start moving their holdings over to the stock market. Stock returns are higher but at the cost of higher risk. After the GFC the Fed became rather obsequious toward the stock market, offering "forward guidance" and various other reassurances, signaling that the Fed was prepared to do whatever was necessary to prevent the stock market from dropping (see https://moneyweek.com/glossary/bernanke-put/
). These actions gave fund managers the reassurances they needed to put a greater percentage of their holdings in stocks, thus pushing the price of stocks higher.
When the cost of borrowing becomes cheap enough, hedge funds and aggressive investors see a further opportunity for profit: borrow money at a low annual rate and invest it in the stock market at a higher rate of return, pocketing the difference. And so stocks get bid up further until the return on investing "on margin" is no longer attractive. Thus stock market indices tend to track the reciprocal
of interest rates: falling interest rates --> rising stock indices and vice versa.
So this explains why stock prices are so high at present -- it is a consequence of the extremely accommodative monetary policy held by the Fed and other central banks since the GFC. And that gives us a good bellwether of what is likely to cause stocks to go down again: rising interest rates. So now the Fed have painted themselves into a corner. So many investors are now so heavily margined that even a minor increase in interest rates would cause a liquidity crisis and force large amounts of stock to be liquidated. Then as the first wave of liquidations pushes stocks lower it also forces the next tier of investors to have to liquidate, like falling dominoes. In December 2018 the mere expectation that the Fed was going to bump up the interest rate a fraction of a percent caused the stock indices to tank. So now the Fed's hands are tied, they can't put rates back up to more normal levels (around 6% per annum) without causing the very market crash that they sought to avert. And at current low rates the Fed has less capacity than usual to respond to future recessions by easing rates. Central banks in other countries are in even more precarious situations.
So don't expect the Fed to be jacking rates any time soon. They may try to gingerly inch the rates a wee bit higher, but as soon as they see stock markets go into spasms they will back off real quick. There is even talk of further easing. However, although the Fed can influence interest rates, they don't have absolute control over them. There are multiple events playing out right now that could cause interest rates to soar higher regardless of anything that the Fed could do to stop it.
One of these is the current administration's hostile trade relations with China, Mexico, Europe, etc. While the administration focuses on their trade deficits, a hidden consequence of this might be the loss of their ability to sell US bonds at low interest rates. To see how this works, consider US trade deficit with China as an example. Americans give $660 Billion annually to China for their goods and services, and China gives the US $241 Billion annually for their goods and services (source https://www.thebalance.com/trade-def...county-3306264
). What happens to the $419 Billion that China receives but does not spend in the US? It uses those funds to buy US government bonds
. So as long as China is happy to keep accepting US dollars and converting them to bonds, the US government benefits by being able to fund deficit spending cheaply. The US administration is currently spitting in the eye of every major trading partner around the world. 39% of US government debt is held by foreign governments. If they lose these buyers (or worse, if the foreign holders of bonds take measures to sell their existing holdings) the US government would have to drastically increase the interest rate offered on their bonds to find enough buyers.
There are other events happening but this post is already too long. To get an advance insight to when the bear market will begin, watch gov't bond prices. Watch for news announcements that China, Germany etc are no longer buying US bonds. And of course watch the stock index charts with your favorite technical analysis tools. You will see it coming from a long way off if you are paying attention.