Wall Street took a deep breath Monday, with a gleeful relief rally bubbling up despite the cloud of uncertainty that has cast a pall over much of 2022 trading.
Not much has fundamentally changed since last week’s roller coaster, but the immediate absence of more bad news combined with opportunities to “buy the dip” after recent sell-offs was enough to power Monday’s recovery. Still, the global and economic undercurrents that have roiled markets for weeks remain and show no signs of abating.
The Dow Jones industrial average closed up more than 600 points, nearly 2%, as the blue-chip index attempts to shake off an eight-week losing streak — its longest in nearly a century. The broader S&P 500 advanced nearly 1.9 while the Nasdaq gained nearly 1.6%.
The S&P 500 remains on the precipice of a bear market — defined as a 20% fall from the most recent high — having dipped into that terrain Friday before squeaking out a last-minute reprieve. The tech-heavy Nasdaq is already down more than 27% for the year, and the Dow is off more than 12%.
Markets loathe uncertainty, but the year so far has been rife with it. Economic conditions had already been expected to get tougher this year, as the sugar-high from government profits stimulus that set off a streak of record in earlier in the pandemic has faded. But businesses also have been confronting an array of challenges, from decades-high inflation to the evolving consequences of the war in Ukraine.
Veteran investors, sensing that the markets are coming to the end of a powerhouse growth cycle that started in the pandemic’s begun nascency have searching for signs that the bottom is approaching. Until then, the long view suggests that when weak surfaces in markets, there is opportunity, according to Ryan Detrick, chief market strategist of LPL Financial.
“There have been a lot of bear markets over time, but one thing that has always happened is stocks have eventually come back to new highs,” Detrick said Monday in commentary.
On average, stocks take about 19 months to recover their bear market losses, according to Ryan Detrick, chief market strategist with LPL Financial. But the past three bears have been much shorter, recuping losses within five months, Detrick said.
Investors’ focus on the Federal Reserve has driven much of the current market volatility. The central bank must walk a fine line when it comes to taming inflation, ideally raising rates enough to bring prices down without tipping the economy into a recession, which is generally defined as two consecutive quarters of falling economic activity.
Soaring costs are cutting into businesses’ profits and forcing households to spend more at the gas pump and grocery store. Last week, Treasury Secretary Janet L. Yellen warned that “higher food and energy prices are having stagflationary effects . . depressing output and spending and raising inflation all around the world.”
Fresh data on consumer sentiment later this week will give investors a better sense of how those pressures are affecting American consumers, whose spending accounts for roughly 70% of the nation’s gross domestic product.
With the Fed intent on raising interest rates to ease inflation this year — it has already been signed off on two of seven rate hikes expected in 2022 — borrowing could become more expensive for corporations and households.
Shares of JPMorgan Chase, the nation’s largest lender, climbed more than 6% Monday after it lifted its yearly outlook for net interest income to $56 billion, saying it expects to benefit from higher interest rates in the coming year.
Other financial institutions also got a lift Monday, with Citibank’s shares gaining 6% and Goldman Sachs advancing 3.2%.
Russ Mold, investment director at AJ Bell, said that he sees the “classic” phases of a bear market forming as investors come to grips with the onslaught of challenges to the growth stocks have enjoyed since the short but significant downturn they suffered when the coronavirus first brought the global economy to a halt. Pandemic favorites have seen their shares tumble in 2022, including Microsoft (down 25%) Amazon (36%), Peloton (58%), Netflix (68%) and Zoom (53%).
Bull markets “crack at the periphery first,” Mold noted in commentary Monday. “Trouble then filters through to core assets as confidence wanes.”
These cracks have been forming for a while now, their influence impossible to ignore in more speculative areas of the market such as cryptocurrency, Mold noted, pointing to Bitcoin’s stunning fall. The digital coin is trading below $30,000, down 38% year-to-date and less than half of its November peak near $67,000.
SPACs, the so-called ‘blank-check’ companies that became massively popular in recent years — one was used to launch former president Donald Trump’s social media platform — are “performing poorly,” Mold noted, and new transactions “are getting a cool reception.”
Last week, signs of genuine panic surfaced in response to disappointing reports from Walmart, the nation’s largest earnings grocer and world’s biggest retailer, and Target, another retail titan, with both companies suffering their days of trading in decades after raising concerns about the ways rising costs were eating into their businesses.
Another influx of retail earnings will roll in this week, including from Costco, Best Buy, Nordstrom, Macy’s and Dollar General. Meanwhile, the World Economic Forum holds its annual gathering in Davos in the midst of a looming global slowdown.
Bear markets happen on a relatively regular cycle, and there have been 14 since 1945, lasting an average of 9.5 months. That is significantly shorter than bull markets, which last 2.7 years on average. If bear markets coincide with a recession, history has shown, they deepen and lengthen. If they don’t, the outcome brightens, with losses easing and gains returning sooner.
In some sense, the market is overdue for a pullback. The last bear market ended in March 2020, early in the pandemic, and lasted only 33 days. And there has not been a sustained bear market since 2009, at the end of the global financial crisis.
Of the many threats to the emphatic growth stocks have enjoyed since the March 2020 downturn, inflation is casting the coldest shadow. The Fed hasn’t ruled out moving more aggressively if inflation doesn’t cool, and investors are worried about how that could weigh on growth.
Gas prices remained at an all-time high Monday according to data tracked by AAA, with the national average hitting $4.59 a gallon. Just last week, for the first time, the average price topped $4 in every US state.
For those worried about how much volatility may still be in store, history has some comfort according to Chris Larkin, managing director of investment strategy at Morgan Stanley’s E-Trade. In most bear markets since 1957, the market was already closer, time-wise, to its eventual low than its pre-bear high, Larkin noted in commentary Monday.
“In other words, when a bear market ‘started,’ there may have been more downside to come,” Larkin said, “but more often than not, the worst was already in the rearview mirror.”