Stocks rebounded this morning as the market’s vertical ramp continued. The Dow, S&P, and Nasdaq Composite all gained while oil retreated. And though stocks traded higher through noon, the major indexes remained below their Tuesday highs.
This could prove to be significant for technical traders if the market fails to surpass those highs in the coming trading sessions. Should stocks retrace further, they’ll set a lower high in the process, possibly preceding a selloff that culminates with taking out the mid-March lows.
If that happens, then what investors experienced over the last week and a half will have been nothing more than a bear market rally, or as some traders call it, a “dead cat bounce.”
During bear markets, this kind of thing is common.
Bulls rip stocks viciously higher before a selloff completely erases the rally’s gains.
Most investors don’t remember what it’s like to trade in a bear market, though. And who could blame them? US stocks haven’t seen a bear market since 2009. The Covid crash technically qualified as one, but it was short-lived relative to the other 25 bear markets since 1929 that preceded it.
Stocks surged rapidly after the market touched bottom in March 2020 just 6 weeks after the Covid-fueled crash began.
By comparison, the typical bear market sees equities grind lower over the course of 10 months on average. The average bear market loss from peak-to-trough was 35%. As of this morning, the S&P is down only 6.5% from its all-time high.
Many analysts believe a bear market continuation is on its way as much of the uncertainty that initially plunged stocks lower still simmers beneath the market’s surface.
“While the stock market is attempting to recover from its correction, markets are fundamentally riskier and more uncertain than before Russia’s invasion of Ukraine,” said Treasury Partners chief investment officer Richard Saperstein.
John Lynch, Comerica Wealth Management’s chief investment officer, commented on how the Fed’s recent rate hike suggests an economic slowdown is well on its way.
“Policymakers were more hawkish than anticipated, exceeding estimates for interest rates and inflation, while reducing forecasts for economic growth,” Lynch said in a note.
“The era of quantitative easing is seemingly over, and quantitative tightening has begun. Though the policy dynamics are shifting, we encourage investors to continue to focus on the long-term fundamentals supporting growth in the economy and corporate profits.”
Lynch’s commentary, while partially accurate, also made one of the most painfully incorrect claims ever uttered by an analyst post-2008:
That the “era of quantitative easing (QE) is seemingly over.”
Virtually everything the market has done since the Fed hiked rates last Wednesday suggests that the opposite is true. Five inversions emerged on the yield curve, which smacks of “policy error.” Stocks also rallied strongly as investors assumed a recession was guaranteed, followed by a new round of QE and rate cuts.
Yes, “quantitative tightening has begun” as Lynch said, but it’s also not going to last very long. The Fed typically slashes rates when yield spreads remain inverted for around 1 month. If that trend holds true this time around, we might not even make it to May (when the FOMC’s next meeting will be held) before the Fed pulls the plug on rate hikes.
Realistically, though, Fed Chairman Jerome Powell & Co. are likely to push rates higher in at least a few more meetings. They only raised rates by 25 basis points (0.25%) last week. That doesn’t give them much room to cut. In addition, the Fed hasn’t even started reducing its balance sheet yet.
But make no mistake about it: the “era of QE” is anything but “over,” pending a Volcker-like series of rate hikes and balance sheet reductions that completely torpedo the US economy. Even then, that would eventually provide the Fed with ammunition to kick off another major round of QE and rate cuts.
That’s what bulls ultimately love (and now expect to happen at some point), hence the market’s rapid post-hike runup of the last week and a half. The question now is whether investors can keep the rally going, or if the “dead cat bounce” will start to take shape while stocks head lower.
