History shows S&P 500 rebound from 2022 low may not signal end of bear market, Bespoke warns

By Christine Idzelis

Tailored research researched first-day gains from bear market lows, finding larger average increases than the S&P 500 saw on Monday

The US stock market rallied on Tuesday, with the S&P 500 index continuing to climb above its 2022 low, but Bespoke Investment Group warns that history shows its recent rebound may not signal the end of the bear market.

Bespoke’s research on first-day gains from bear market lows found that bear markets typically end with even bigger moves than the one seen on Monday, when the S&P 500 jumped 2.6%. The average upward movement is “actually over 4%!” the firm wrote in an October 3 note.

US stocks are trading this week as Treasury yields fall and the surging US dollar loses some of its strength. The market moves come as investors look for any hint that the Federal Reserve might back off from its aggressive monetary policy tightening.

Read:A moment Bear Stearns waits if actions like Bank of England intervention don’t calm markets, BofA analysts say

On Monday, “markets clearly benefited from huge yield declines, which benefited from the fact that Richmond Fed Chairman Barkin echoed Governor Brainard’s speech on Friday with concerns about the impact of the dollar strength,” Bespoke said in its note. The reversal in the US dollar, along with lower yields and higher equities, showed that investors “clearly bought into this concern as the latest source of potential Fed collusion.”

Bespoke was referring to comments from Fed Vice Chairman Lael Brainard and Thomas Barkin, President of the Federal Reserve Bank of Richmond.

While US dollar strength has eased this week, the ICE US Dollar Index is still up about 15% so far this year, according to FactSet data, at last check. The dollar rose as the Fed tightens monetary policy to fight high inflation.

“Overall, dollar appreciation tends to lower import prices into the United States,” Brainard said in his Friday speech addressing global financial stability considerations. “But in some other jurisdictions, the corresponding currency depreciation may contribute to inflationary pressures and require further tightening to compensate.”

The Fed is “watchful for financial vulnerabilities that could be exacerbated by the advent of additional negative shocks,” Brainard said in his speech. “For example, in countries with high levels of sovereign or corporate debt, higher interest rates could increase the debt service burden and concerns about debt sustainability, which could be exacerbated. by the depreciation of the currency.

Read:U.S. dollar dominance tends to hurt these stock market sectors less, RBC says

As for lower Treasury yields, the 10-year Treasury fell 15.2 basis points on Monday to 3.650%, while the two-year Treasury yield fell 10.3 basis points to 4.103 %, according to Dow Jones Market Data. Treasury yields continued to fall on Tuesday, with the two-year at 4.08% and the 10-year falling to 3.60%, according to FactSet data, at last check.

Read:Why 2-year Treasury yields are ‘the core problem’ in the struggling stock market, according to this Morgan Stanley portfolio manager

Meanwhile, the ICE US Dollar Index, a measure of the strength of the dollar against a basket of rival currencies, fell more than 1% around noon on Tuesday.

The U.S. stock market rose sharply again on Tuesday, with the Dow Jones Industrial Average jumping 2.6%, the S&P 500 climbing 2.9% and the Nasdaq Composite jumping 3.3%, according to FactSet data, at the last check.

But after this week’s rebound, the S&P 500 remains down more than 20% this year, based on midday trading Tuesday.

“It’s easy to read very high two-way volatility on assets as the signal for a Fed pivot is finally here, but we just haven’t seen a reason for it,” Bespoke said. “Until the Fed takes a sustained step back from its inflation concerns, the headwinds for stocks and bonds as well as the tailwinds for the dollar will continue.”

Also Read: Rising Interest Rates, Economic Slowdown and Rising Unemployment Will Cause US Households to Sell More Stocks in 2023: Goldman Sachs

-Christine Idzelis

 

(END) Dow Jones Newswire

10-04-22 1234ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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