Wall Street on track for a breather, but bear market looms

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Wall Street took a deep breath Monday, with a gleeful relief rally bubbling up despite the cloud of uncertainty that has cast a pall over much of 2022 trading.

Not much has fundamentally changed since last week’s roller coaster, but the immediate absence of more bad news combined with opportunities to “buy the dip” after recent sell-offs was enough to power Monday’s recovery. Still, the global and economic undercurrents that have roiled markets for weeks remain, and show no signs of abating.

The Dow Jones industrial average had climbed more than 700 points, or 2.2 percent by lunchtime as the blue-chip index attempted to shake off its longest weekly losing streak in nearly a century. The broader S&P 500 advanced 1.9 percent, while the Nasdaq gained 1.6 percent.

The S&P 500 remains on the precipice of a bear market — defined as falling 20 percent from a recent high — having dipped into that terrain Friday before squeaking out a last-minute reprieve. The tech-heavy Nasdaq is already down more than 27 percent for the year, and the Dow is off nearly 14 percent.

Markets loathe uncertainty, but the year so far has been rife with it. Conditions were already expected to get tougher this year, as the sugar-high from unprecedented government stimulus that set off a record-breaking streak of profits earlier in the pandemic has faded. But businesses have also been forced to confront an array of unexpected challenges, from decades-high inflation to the evolving consequences of the war in Ukraine.

Veteran investors, sensing that the markets are coming to the end of a powerhouse growth cycle that started in the pandemic’s nascency, have begun searching for signs that the bottom is approaching. But in the meantime, the long view suggests that when weakness surfaces in markets, there is opportunity, according to Ryan Detrick, chief market strategist of LPL Financial.

“There have been a lot of bear markets over time, but one thing that has always happened is stocks have eventually come back to new highs,” Detrick said Monday in commentary.

On average, stocks take about 19 months to recover their bear market losses, according to Ryan Detrick, chief market strategist with LPL Financial. But the past three bear markets have been much shorter, recouping losses in five, four and four months, Detrick said.

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Lately, one of the biggest drivers of market volatility has been investors’ apparent lack of confidence in the Federal Reserve. The central bank must walk a fine line when it comes to taming inflation, ideally raising rates enough to bring down prices without tipping an already-cooling economy into a recession, which generally is defined as two consecutive quarters of economic decline.

Soaring costs are cutting into businesses’ profits and forcing households to spend more at the gas pump and grocery stores. Last week, Treasury Secretary Janet L. Yellen warned that “higher food and energy prices are having stagflationary effects … depressing output and spending and raising inflation all around the world.”

Fresh data on consumer sentiment later this week will give investors a better sense of how those pressures are affecting American consumers, whose spending accounts for roughly 70 percent of the nation’s gross domestic product.

With the Fed intent on raising interest rates to ease inflation this year — it signed off earlier this month on the second of seven expected in 2022 — borrowing could become more expensive for corporations and households.

Shares of JPMorgan Chase, the nation’s largest lender, climbed more than 7 percent Monday after it lifted its yearly outlook for net interest income to $56 billion, saying it expects to benefit from higher interest rates in the coming year.

Other financial institutions also got a lift Monday, with Citibank’s shares gaining 7 percent and Goldman Sachs advancing 4 percent.

Russ Mould, investment director at AJ Bell, said that he says he sees the “classic” phases of a bear market forming as investors come to grips with the onslaught of challenges to the growth stocks have enjoyed since the short but significant downturn they suffered when the coronavirus first brought the global economy to a halt. Pandemic favorites have seen their shares tumble in 2022, including Microsoft (down 25 percent) Amazon (36 percent), Peloton (58 percent), Netflix (68 percent) and Zoom (53 percent).

Bull markets “crack at the periphery first,” Mould noted in commentary Monday. “Trouble then filters through to core assets as confidence wanes.”

These cracks have been forming for a while now, their influence impossible to ignore in more speculative areas of the market such as cryptocurrency, Mould noted, pointing to Bitcoin’s stunning fall. The digital coin is trading below $30,000, down 36 percent year-to-date and less than half of its November peak near $67,000.

SPACs, the so-called ‘blank-check’ companies that became immensely popular in recent years — one was used to launch former president Donald Trump’s social media platform — are “performing poorly,” Mould noted, and new transactions “are getting a cool reception.”

Last week, signs of genuine panic surfaced in response to disappointing earnings reports from Walmart, the nation’s largest grocer and world’s biggest retailer, and Target, another retail titan, with both companies suffering their worst days of trading in decades after raising concerns about the ways rising costs were eating into their businesses.

Another influx of corporate earnings will roll in this week, including reports from Costco, Best Buy, Nordstrom, Macy’s, Dollar General and Zoom. Meanwhile, the World Economic Forum holds its annual gathering in Davos in the midst of a looming global slowdown.

Bear markets happen on a relatively regular cycle, and there have been 14 since 1945, lasting an average of 9.5 months. That is significantly shorter than bull markets, which last 2.7 years on average.

If bear markets coincide with a recession, history has shown, they deepen and lengthen. If they don’t, the outcome brightens, with losses easing and gains returning sooner.

In some sense, the market is overdue for a pullback. The last bear market ended in March 2020, early in the pandemic, and lasted only 33 days. And there has not been a sustained bear market since 2009, at the end of the global financial crisis.

Of the many threats to the emphatic growth stocks have enjoyed since the March 2020 downturn, inflation is casting the coldest shadow. The Fed hasn’t ruled out moving more aggressively if inflation doesn’t cool considerably, and investors are worried about how that could weigh on growth.

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Gas prices remained at an all-time high Monday according to data tracked by AAA, with the national average hitting $4.59 a gallon. Just last week, for the first time, the average price topped $4 in every U.S. state.

For those worried about how much volatility may still be in store, history has some comfort according to Chris Larkin, managing director of investment strategy at Morgan Stanley’s E-Trade. In most bear markets since 1957, the market was already closer, time-wise, to its eventual low than its pre-bear high, Larkin noted in commentary Monday.

“In other words, when a bear market “started,” there may have been more downside to come, but more often than not, the worst was already in the rearview mirror,” Larkin said.