Breakout Or Head Fake?

Mott Capital Management |

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NOTE: The charts for this article are well-worth reviewing. Please click the link for the original article. History may be repeating history itself. At the beginning of August, I noted that The S&P 500 May Be Near The Most Dangerous Phase Of The Bear Market. At that point, the S&P 500 (SP500, SPX) was in a significant uptrend, and it seemed as if there were very few signs of it slowing down. The stock market had convinced itself following the July FOMC meeting that after two consecutive quarters of negative real GDP, the Fed was showing signs of throwing in the towel and making a "dovish" pivot. It would seem as if a series of independent events put the rally of 2022 into motion. But what if it wasn't due to these events? What if the market was simply following a typical bear market cycle? 2000: The S&P 500 rallied sharply from around December 20, 2000, until the beginning of February 2001, a nearly 10% gain over that short time. Interestingly, the rally in December 2000 started on weaker than expected economic data, fueling hopes that the Fed would start cutting rates in 2001. The rally fizzled in early February when the monthly job report was weaker than expected but not soft enough to force rate cuts, which sounds eerily similar to today's "dovish pivot" narrative. The market fell sharply until the middle of April when it mounted another big rally. The rally started on April 18, 2001, when the Fed shocked investors with a surprise rate cut of 50 bps. Of course, the bear market was far from over; the S&P 500 didn't bottom and turn higher until March 2003, as valuations took time to reset and earnings growth was slow to return. 2008: The 2008 bear market saw a rally that began on March 18, 2008. Following news on March 17, 2008, that JPMorgan would buy Bear Stearns for $2, the Fed cut rates by 75 bps on the 18th. Stocks continued to rally through April due to a better-than-feared earnings season. Of course, that all started to crumble around May 21, 2008, when the Fed minutes indicated the Fed was less reluctant to cut rates further while boosting its inflation targets and reducing its growth outlook. Of course, in 2008, there was no big rebound following that sell-off. Stocks fell dramatically for several months and did not bottom until March 2009, as the collapse of Lehman Brothers led to a financial crisis. 2022: Fast forward to 2022, and while the scenarios aren't the same, they do have strong similarities. Today, the Fed is aggressively raising rates due to high inflation. In July, hopes that the Fed would slow rate hikes or even pause helped to push markets higher. Given rising inflation, interest rates, and the Fed's determination to slow the economy, the idea that this 2022 bear market will turn on a dime, as many investors have grown accustomed to since 2010, seems highly unlikely. The Fed is not likely to waver any time soon, and earnings could be negatively impacted if the economy slows as the Fed intends. It leaves this bear market cycle far from over or until the Fed changes its policy path.