Although the S&P 500 only fell into bear market territory in June, it has been steadily declining since its January peak. Yet, since then, it has experienced seven bear-market rallies.
Meera Pandit
Global Market Strategist
Hi, my name is Meera Pandit, global market strategist at JPMorgan Asset Management. Welcome to On the Minds of Investors. Today's topic, is this a bear market rally? Markets picked up steam recently, anticipating that the Federal Reserve could follow a 75 basis point rate hike in November with a smaller 50 basis point rate increase in December.
Markets have been rallying since mid-October up 7% since the mid-month low. But is this just another bear market rally? Although the S&P 500 only fell into bear market territory in June, it has been steadily declining since its January peak. Yet since then, it has also experienced seven bear market rallies.
What has precipitated these rallies? We've seen some optimism on economic growth, hopes of softer inflation and an easier Fed, and less bad than feared earnings. Sound familiar? We have been here before.
When markets begin to perk up, we must ask ourselves, what has changed? To decide if this could be a durable rally. Although the Fed is likely eyeing an exit strategy to decelerate and then pause rate hikes, inflation and jobs data has continued to firm.
There will still be two releases of both CPI and the employment report before the December press conference that could determine whether they move 50 basis points or 75 basis points. So markets will be highly sensitive to incoming data throughout the next several weeks.
What has continued to reverse these rallies throughout the year has been higher expectations of the ceiling on the federal funds rate. For example, the market low on June 16th followed a 91 basis point jump over the prior week in the expected terminal rate. Therefore, irrespective of what happens in November and December meetings, we may not see a sustained bull market until the federal funds rate plateaus.
Yet bear market rallies can still provide attractive returns that can help portfolios recover. The seven bear market rallies this year, including the current one, returned over 8% on average. While this may not be the moment to add to equities, staying invested can help portfolios recover in the long run.
Markets picked up steam recently, anticipating that the Federal Reserve (Fed) could follow a 75 bps rate hike in November with a smaller 50 bps rate increase in December. Markets have been rallying since mid-October, up 7% since the mid-month low. But is this just another bear market rally?
Although the S&P 500 only fell into bear market territory in June, it has been steadily declining since its January peak. Yet, since then, it has experienced seven bear-market rallies. What has precipitated these rallies? We’ve seen optimism on economic growth, hopes of softer inflation and an easier Fed, and “less bad than feared” earnings. Sound familiar? We have been here before.
When markets begin to perk up, we must ask ourselves, “What has changed?” to decide if this could be a durable rally. Although the Fed is likely eyeing an exit strategy to decelerate and then pause rate hikes, inflation and jobs data has continued to firm. There will still be two releases of both CPI and the employment report before the FOMC’s December meeting that could determine whether they move 50bps or 75 bps, so markets will be highly sensitive to incoming data throughout the next several weeks.
What has continued to reverse these rallies throughout the year has been higher expectations of the ceiling on the federal funds rate. For example, the market low on June 16 followed a 91bps jump over the prior week in the expected terminal rate. Therefore, irrespective of what happens in the November and December meetings, we may not see a sustained bull market until the federal funds rate plateaus.
Yet, bear market rallies can still provide solid returns— the seven bear-market rallies this year (including the current one) returned over 8% on average. While this may not be the moment to add to equities, staying invested can help portfolios recover in the long run.
2022 Market rallies and projected ceiling on federal funds rate
S&P 500 Price Index, Federal funds futures contracts
Source: Bloomberg, S&P, J.P. Morgan Asset Management. Market expectations for highest terminal federal fund rate are based on federal funds futures contracts for March and May 2023 expiry. Chart data are as of October 24, 2022. Returns096s222710143351 cited in text are through October 26, 2022.
096s222710143351