The Unusual Course of the Bear Market
In the world of finance, few spectacles can rival the dramatic arc of a bear market. The plot typically features a ferocious sell-off, resulting in an economy plunged into despair, followed by a slow, grinding recovery. But the script has been flipped. The bear market that started in early 2022 and engulfed the S&P 500 (SPX) is now just 260 points shy of complete erasure. This resurrection has happened in less than 20 months, challenging the conventional understanding of financial downturns and recovery periods.
The Context: Inflation Wars and Dire Predictions
Back in 2022, the US economy was under siege. Jerome Powell, Chair of the Federal Reserve, was striving to combat inflation while ominous signals emanated from the bond market. Most analysts and observers foresaw a looming recession. The picture was one of economic gloom, with the bear market consuming a sizable portion of equity values. But today, the scenario has dramatically flipped, and chart patterns across various sectors are painting a tableau of growing economic strength.
Navigating the Paradox: Economic Signals vs. Market Performance
Despite some economic signals from the US remaining less than robust, and Federal Reserve policy makers still voicing concerns about inflation, investors have exhibited resilience. The stock market has surged upward eight times in the past ten weeks, suggesting that investor optimism is driving this rally. The bear market that marked last year seems to be unraveling at a pace that has only been outpaced thrice since World War II. This phenomenon has taken many by surprise, including seasoned investors like Dennis Davitt, co-manager of the MDP Low Volatility Fund. He remarked, “I’m shocked that the Fed has really pulled off the soft landing and everybody is caught underweight equity exposure.”
The Resurgence: $10 Trillion Restored and Counting
Over the past nine months, the markets have rebounded fiercely, restoring close to $10 trillion to equity values. Job growth, consumer spending, and corporate earnings have all defied the naysayers, painting a brighter picture than initially forecasted. The S&P 500, rebounding 27% from its October trough, is now only about 5% away from reclaiming its all-time high of 4,796.56, attained in January 2022. If this trend continues, the index might make a full recovery by September, accomplishing the turnaround at twice the speed of the average of the previous twelve cycles.
The New Drivers: Cross-Sector Surge
In the initial stages of the rally, it was technology megacaps (NDX) that were the primary drivers of recovery. However, as recession fears began to fade, the rally started taking a more diverse form. From small-cap companies to energy and banking sectors, economically sensitive shares have emerged as the new drivers of the market’s upward trajectory. This cross-sector surge reflects a sense of growing optimism and a belief in a ‘soft landing’ for the economy.
Conclusion: A New Era in Financial Markets?
The rapid recovery of the markets from a bear market, against the backdrop of a global pandemic and inflation fears, could potentially indicate a new era in financial markets. The usual scripts of bear markets and recovery periods are being challenged, and a new narrative of resilience and adaptability is being written. As we move forward, these shifts could significantly influence investment strategies, market analyses, and our understanding of economic cycles. Only time will reveal the full extent and sustainability of this remarkable turnaround, as the bear market that began less than 20 months ago continues its journey towards total erasure.