Weekly Market Pulse: Is This A Bear Market?

Weekly Market Pulse: Is This A Bear Market?


The yield curve has flattened considerably and the spread between the 2-year and 10-year Treasury yield is currently just 25 basis points.

Many of the large, popular stocks are still grossly overvalued in my opinion.

Value stocks continue to outperform.

MCCAIG/E+ via Getty Images I don’t know the answer to the question posed in the title. No one does because the future is not predictable. I don’t know what will happen in Ukraine. I don’t know how much what has already happened there – and what might – matters to the US and global economy. I don’t know if the Fed is making a mistake by (likely) hiking interest rates by an entire 1/4 of 1% this week. I can only see things as they are today and think about similar times in the past and know that it is different this time because it is always different this time. I can look back at history to the Crimean War in the mid-1850s when Russia faced off against the West in part of Ukraine and marvel at how little things have actually changed over the last 170 years. I can read “The Charge of the Light Brigade” and marvel at the bravery – or idiocy – of Brits charging down the Russian guns on horseback armed with swords. But I don’t think I will get much information that will be relevant to managing our portfolios today. Yes, indeed, things are different this time.

The S&P 500 is down 12.7% from its all-time intraday high, set on the second trading day of this year and so doesn’t qualify for bear market status which is generally agreed on as -20%. That peak-to-trough drawdown is actually a tad below the yearly average for the S&P 500 since 1950 (-13.6%). In other words, this isn’t anything special although I’m sure it doesn’t feel that way to most people. Why? Because the S&P 500 is just part of the market. The NASDAQ composite index peaked in November and is down 20.8%. The Russell 2000 index of small-company stocks peaked in early November, before the NASDAQ, and made its intraday low – so far – on the day Russia invaded Ukraine (-22.9%). Those markets are in a four-month decline that definitely qualifies for the bear tag. European stocks fell 26% from intraday high to intraday low and are still down 21% from the high. That’s a bear market. Chinese stocks ( MCHI – iShares MSCI China) are down 49.2% since peaking in February of last year. That is most definitely a bear market. Almost every national stock market in Europe is in a bear market. Korea peaked over a year ago and is down nearly 30%. On the other hand, Latin American markets are up 15.5% YTD despite Chile being in the middle of rewriting their Constitution and Colombia on the verge of becoming the latest country in the region to shift left politically. Who predicted that in their 2022 Outlook?

There are bear markets and bull markets going on all the time. The task of an investor is to own fewer of the former and more of the latter. You’ll never be able to own none of the former and all of the latter – and trying to do so will probably cost you as many bulls as bears.

It is easy to get distracted by all that is going on in the markets and the world more generally. The Fed has stopped QE and will raise interest rates this week by 0.25%. Russia and Ukraine will continue fighting and talking, probably a lot of the first and little of the second. They might come to a ceasefire – or not. Oil prices are up 45% this year and 65% over the last year. That is going to impact the US and global economy but the magnitude is hard to judge. The US is still a large producer of crude oil and we are a lot more energy efficient than 2008, the last time we had an oil shock. Other commodities are up too, from wheat to corn to palladium. There’s a lot to worry about – and nowhere near a complete list – and there is no way to determine in advance exactly how the economy will adjust to any of them.

Rather than try to predict how all these things will be resolved – something no one can really do – investors should concentrate on observing and interpreting the present as best as they can. […]

source Weekly Market Pulse: Is This A Bear Market?

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