Could be the start of a stock market rally

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The S&P 500 index closed up 6.33% for the week ending June 24, 2022. For investors, this looks like a huge win after the market fell -10.93% in the two previous weeks and before this week, the S&P 500 hit a bear market territory reaching a level causing the market to fall by more than -23% over the year. Investors have faced high market volatility as the year approaches the halfway point. This week’s 6+% return is the third week this year that the S&P 500 Index has generated a return above 6%. There was no week in 2021 that had a return above 6%.

With the S&P 500 Index falling into bearish territory last week, yield down more than -20%, the downtrend for institutional and individual investors has increased, as I have noted in several previous articles , here and here. Sentiment around the economy has also reached a high negative level. The University of Michigan consumer sentiment reading released on Friday fell to a record high of 50.0 for June. Below the graphic are several excerpts from the survey statement:

University of Michigan Consumer Sentiment for June 2022

  • About 79% of consumers expected bad times in the coming year for trading conditions, the highest since 2009.
  • Inflation continued to be a major concern for consumers; 47% of consumers blamed inflation for eroding their standard of living, just one point short of the last high reached during the Great Recession.
  • Consumers also expressed the highest level of uncertainty about long-term inflation since 1991, continuing a sharp rise that began in 2021.

Back to the S&P 500 exit from the bear market, is the thought that the bear market bottom has been reached and what does a recovery look like? In a recent report by Lindsey Bell, chief market and money strategist for Ally, she highlights data on the economy and a bear market. From an economic perspective, the economy reached stall speed or even negative growth in the first quarter after a strong 2021. His article, “How Much is the Market Roaring? includes a chart noting previous bear markets dating back to 1946 and nearly half saw declines between 20-30% and the current bear is down -23.5%. The average return 3 months and 12 months after the end of the bear market was 20% and 42%, respectively.

The S&P 500 returns after a bear market

As shown in the chart above, bearish declines can exceed 40% and include intermediate rallies before reaching a bear market low. Michael Kantrowitz, CFA, chief investment strategist at Piper Sandler, shows the bear market rallies of 2000/2002 and 2008/2009 in the charts below.

S&P 500 Bear Market Rallies 200/2002 and 2008/2009

I think Lindsey Bell summed up the current environment well when she noted in her article,

The good news is that mild recessions [if we do enter a recession] generally exhibit less severe bear markets. If so, then market lows, at least by historical standards, are near. This means that the next few months could be the perfect time to invest for those with a time horizon that spans several years.

Of course, only time can tell, but there are plenty of stocks that are down far more than the market itself, and investors might find long-term opportunities in some of these companies. Knowing your investment time horizon is always essential, but especially so in times like today.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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