Is the bear market coming to an end?

Anthony Saglimbene, Chief Market Strategist – Ameriprise Financial

As of Aug. 15, 2022

It’s no surprise that managing through bear markets is one of the most challenging aspects of investing. The fear, uncertainty, and elevated market volatility can often bring out some of the worst investor behaviors. 

Case in point: the natural human instinct to avoid pain can lead some investors to shield their portfolios from the storms when stock prices are declining more aggressively. Unfortunately, this tendency can quickly lead investors to make poorly timed decisions that focus on the near term and lack alignment with their longer-term financial goals. 

Staying the course with the financial plan you created with your advisor is the best course of action during challenging times like these. Still, with July yielding an impressive performance for stocks, it’s natural for investors to wonder if we’re finally emerging from this bear market. In other words, is “the pain” coming to an end?

Here’s our view:

Keeping 2022 in perspective

Through the end of July, the S&P 500 Index was lower by 12.6% year-to-date on a total return basis. But that’s following the S&P 500 gaining +28.7% in 2021, +18.4% in 2020, and +31.5% in 2019. Record high inflation, tightening monetary policy, and slowing growth across various economic measures have overshadowed a still resilient business and consumer backdrop this year. Yet over the last five years, the S&P 500 has returned over +65% cumulatively through the end of July and is higher by over +20% since mid-February 2020. 

While the Index has recovered roughly +17.5% from its mid-June low and is down approximately 11% from its record January close, very few investors would argue that the recent stock rally indicates the market is out of the woods. As a point of reference, both the NASDAQ Composite and Russell 2000 Index remain firmly in bear markets today (i.e., down more than 20% from their highwater marks).

As volatile and challenging as the pandemic era has been for investors to navigate, stocks remain higher than at the start of the pandemic and by a significant amount. Consider the strong longer-term performance of stocks in relation to this year’s declines. Doing so may help recenter your focus and keep portfolio losses this year in perspective.  

Is this the start of a stock market rebound?

Whether the current bounce in stock prices is just a bear market rally or the beginning of a more meaningful recovery, investors have been served well by staying the course over the last five years. Continuing to allocate toward stocks and leaning into high-quality/dividend-focused investments remains a solid investment strategy, despite this year’s steeper declines. Importantly, the issues of the day will eventually pass, and stocks, at some point, will look to discount a brighter future.

With that said, given that Q2 corporate earnings reports and outlooks have come in better-than-feared and inflation pressures may show more evidence of potentially peaking, investors are beginning to ask if the bear market is finally coming to an end. While stock rallies can feel good following periods of elevated volatility or prolonged drown drafts in prices, bear market rallies and more sustainable recoveries look very similar in the early stages. Thus, we believe it is nearly impossible to answer that question with any precision at the moment. 

Why – and why not – it may be the end of the bear market

On the one hand, stock valuations have come down to near longer-term averages, a shallow recession is likely already priced into stocks, consumer/business fundamentals remain sound, equity positioning among professional money managers is very conservative, and investor sentiment remains at weak levels historically. Combined with the potential for some moderation in inflation pressures over the coming months and a less aggressive Federal Reserve by the end of the year, investors might be right to shake off some of their worst-case fears from mid-June and push stock prices higher. 

But on the other hand, inflation pressures remain historically high, the Federal Reserve is currently pushing back on the idea of a pivot to easier policy, and earnings estimates are coming down for the back half of the year. Also, stock valuations have not meaningfully pierced through longer-term averages, and investors have not capitulated in mass. 

Notably, at least some of the recent stock rally since the mid-June lows can be attributed to a technical bounce after extreme defensive positioning forced traders and some money managers to reenter the market. Moving forward, we expect the current stock rally to eventually lose some steam and the bears to reengage in testing the strength and durability of recent gains. 

Recovery indicators to watch for

For us to be more convinced that the current stock rally can become more lasting, we would like to see the following:

• A near-term pullback that sees the S&P 500 give back some, or all, of its recent gains but hold near or above its mid-June lows.
• Earnings growth that slows but remains positive in the second half, with companies maintaining their ability to protect profit margins. 
• Inflation pressures that moderate over the coming months, with the Federal Reserve eventually slowing rate increases by the end of the year.
• A stable job market, with the unemployment rate remaining below 4.0%.
• A “normalization” in demand and the economy avoiding a more sudden shift lower in consumer/business spending.
• Interest rate stabilization, with the 10-year U.S. Treasury yield holding below 3.5%.

Unfortunately, evidence of these factors will take time to develop and argues for a still cautious and balanced investment approach, despite the recent stock rally. But as the chart below shows, bear markets eventually end, and stock returns tend to be quite positive in the months and years following.

During bear or bull markets, your financial advisor is here

All investors want to preserve their portfolio and the wealth they accumulated over years of diligent saving and intelligent investing. Yet, how an investor manages through downturns can significantly affect their portfolio’s long-term performance and path to their financial goals. If you’re having difficulties staying on track during this bear market, reach out to your Ameriprise financial advisor. They can talk with you about how the plan you put in place together was built to weather down markets like this one.