Just when you think you've got this thing worked out, the market will pull an ace from under it's sleeve. It's a tough gig, financial markets.
After an insane 2021 (+27%), the US stock market fell about -23.55% from it's peak earlier in 2022, on concerns of the impact inflation and interest rates will have on corporate earnings, and triggered a bear market - don't be afraid, it's an arbitrary number, you know, just a made up threshold.
Although the wind has been taken out of it's sails over the last week or so, especially since the Federal Reserve's chair spoke at Jackson Hole on Friday, the stock market has rallied +17% since bottoming out on the 16th of June. In fact, retracing slightly more than 50% of the decline it had experienced this year.
The bulls say it's a break the market needs before it continues to run higher, the bears say it's a bear market rally and that the market still has room to fall beyond it's June lows.
In this week's chart, we take a look at this rally against historical rallies - both ones that marked the start of new bull markets, and ones that turned out to be bear-market rallies.
The magnitude and speed of this recent rally doesn't really tell us much, it looks very similar to that of both bull and bear market rallies when compared with market history. What makes this rally a little different is it's magnitude.
The chart below shows each major bear-market rally since the 1920s, and highlights how far—in terms of retracing or recapturing declines—the rally went before it reversed. Here we see that during past bear-market rallies, the retracement never went much above 50% (with the exception of the rally off the post-WWII bear market in the late 1940s).
If this rally continues much further than it has so far then we could be at the beginning of a new bull market as this level of retracement rarely happens during bear market rallies. However, if this is a bear-market rally, it likely has gone about as far as it will go.
I feel like this market is one of the toughest markets to observe and make sense of. We have conflicting data, headlines, and sentiment, all mixed in the same pot. From a global pandemic, to a ragging bull market within weeks. From low inflation for 15 years to record inflation in 12 months. From negative interest rates, to one of the most aggressive rate hike periods in history. From US$200 a barrel of oil, to negative oil prices. If markets rally from here to make all time highs, it wouldn't surprise me. If markets collapse from here and we fall into an economic recession, that too wouldn't surprise me.
My colleague Matt Rigby and I talk more about this in last week's The Wide Lens podcast.
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