Bear Market Rally or Bottom?
While the midsummer stock market rally from the lows has been a welcome reprieve, we caution investors not to let their guards down. The definition of a “bear market rally” is nebulous, but for comparison to today’s price action, we’ve decided historical instances should meet all of the following criteria.
• Must follow a drawdown of at least 20% from the market’s previous all-time high
• Must be a gain of 10% or more from the bear market’s prior low
• Must be followed by another decline that represents a new low for the selloff (i.e., not be the first leg in the market’s recovery back to all-time highs)
According to those parameters, we found that five of the six major selloffs since the ’70s had at least one relief rally of more than 10% before dropping again to make fresh lows (2020’s lightning-quick selloff was the exception). The Global Financial Crisis and Tech Bubble each had three; the late ’80s bear market—which was not accompanied by a recession—had one.
The point is, intra-selloff rallies can and have happened. While we’re not insisting that the S&P 500 will have to retest the 3,666 lows hit in June, we’re not convinced that a sustainable upside path for stocks has gotten any easier at the current juncture. Inflation is still untenably high, the Federal Reserve is keeping its policy options open, and earnings expectations just started getting revised lower.
The macroeconomic backdrop is still rife with uncertainty, and the potential for risk assets to re-test their prior lows leaves us with a preference for more defensive exposures. This rally may be a good opportunity to reposition into less risky exposures, some of which may now offer potential returns sufficient enough to stay on track toward financial goals.
Inflation is still untenably high, the Federal Reserve is keeping its policy options open, and earnings expectations just started getting revised lower.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
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