- Oct. 18, 2022
-- Markets showed a welcome glint of resiliency last week, holding on despite an inflation report that could have added to the chorus of concerns that the Fed is destined to overstay its welcome. While the September consumer price index (CPI) showed that consumer prices are still rising at an uncomfortable clip, stocks rallied sharply on Thursday (the Dow staged a 1,500-point intraday swing higher) to stem the tide of weakness that had led equities back to 2022-lows1
. We don't think we've seen the end of inflation-driven volatility, but the market's measured reaction – which we think indicates that there is already a large amount of pessimism priced into stocks and bonds - offers an encouraging signal that we're making progress within the current bear market.
Bear-market declines are never comfortable. They have a knack for turning long-term investors into short-term traders. We'd caution against succumbing to this tendency, even as moving to the sidelines or higher short-term yields offer what may appear at the moment to be an enticing hiding spot. We maintain our view that we're progressing through the bottom portion of a "U-shaped" recovery, and the potential for interim pockets of strength, as well as costs associated with trying to time the ins and outs, highlight the importance of a disciplined strategy to ensure you're well positioned for an eventual, more sustainable rebound. Consider the bear-market perspectives below, which offer some support to a case that we may be inching closer to the end than the beginning of this downturn.
Sources: 1. Bloomberg
- Some of the largest down days in the stock market often occur within close proximity to the largest up days. This can be a sign that news and trends are less one directional, with sizable daily swings in both directions offering a view that conditions are becoming more balanced.
- The headwinds from further Fed rate hikes and a slowing economy are not yet exhausted. However, as the table above shows, in the later portions of bear markets, we begin to see sizable daily gains interspersed within sell-offs. The last 10 trading days have included three days in which the S&P 500 rose more than 2.5% and the Dow gained more than 750 points1.
- This bear market is 10 months old, putting it a few months away from the average length of a downturn over the last 60 years1. The calendar alone won't be the determinant of a turnaround, but we do think this reflects some maturity to this phase of weakness.