Grin and Bear It

By Pete Biebel, Senior Vice President Many stock market media outlets have recently described how the S&P 500 Index (SPX) narrowly missed entering a bear market at its low last week. Those claims are based on the misguided notion that, until prices decline by more than 20%, there’s no bear market. The 20% number seems to have been conjured up for the convenience of business reporters so they can sound like they know what they’re talking about. The fact is, we’ve been in a bear market pretty much all year. Except for a two-week bounce in March, the broad averages have been in the red and trending lower since the first day of trading in January. Many individual stocks have been trending lower from highs they reached a year or more ago. Regardless of whether the media calls it a “bear,” the drawdowns investors have experienced in their investment portfolios and 401-(K)s are no less painful with SPX down only 18%. Whether the business media believe we’re in a bear market is irrelevant. If/when the decline in SPX exceeds 20%, it won’t change anything for investors. It would certainly not be a signal to take any drastic action. The prudent course for investors now is to be thankful for the buying opportunities that such a pullback creates. Rather than wringing their hands over the recent paper losses, investors should be talking with their advisors about what rebalancing steps might be appropriate in the coming months. While it might still be too soon to go aggressively shopping for bargains, it’s probably not too soon to begin browsing. Many stock market media outlets have also recently used the title of my article of two weeks ago, “Are We There Yet?” Not only is that a common theme among analysts these days, but it is also indicative of the high level of pessimism and bearishness that has developed in recent weeks. And that’s good news, at least for the next week or two. The market averages came into the week in an oversold condition. As they were stretched even more steeply lower in the first half of the week, it created a condition in which a steep rebound rally could begin at any time. A big rally in the closing hour on Thursday finally got the party started. From calls I received last week it was evident that the level of fear in the market was back into the range it reached two years ago in the early stages of the pandemic. And that too is probably good news. In an email I sent to some of our advisors on Thursday, I wrote, “In more general terms, I think the scenario is…

• Much of the excess of the 2020/2021 bull market has already been wrung out
• Most of whatever damage will be done to the broad indices has already occurred.
• The market is oversold on a short-term basis, so a rebound rally (likely a fairly steep rally) is probably in the near future.
• The fact that volatility has not subsided suggests that we can’t yet rule out the possibility of a lower low.
• Some (maybe many) good quality stocks are going to make their lows before the market averages bottom out.
• It’s okay to start taking advantage of bouts of weakness to begin accumulating positions in high quality companies with strong balance sheets that appear to be at bargain prices.”

The last several weeks have seen numerous examples of the market averages accelerating lower after they’ve taken out previous lows. While there’s no doubt that technical selling has been a big part of the recent weakness, commentary from Fed officials has also contributed to the increasing bearishness. It seems that a 75-basis point hike in the Fed’s target for its key lending rate is now a much greater possibility than was alleged a week-and-a-half ago. For the week, the major indices all lost between 2% and 3%, and that was only after rebounding multiple percentage points from their Thursday lows into Friday’s close. The only U.S. equity sector to make it through the week with a gain was Consumer Staples, which eked out a 0.3% net increase. At the bottom of the list, four sectors had losses of between 3% and 4%: Technology, Financials, Consumer Discretionary and Real Estate. Having begun in such an oversold condition, the rebound rally should continue over the next week or two, but it doesn’t have to. We’ll want to see follow-through gains early this week. Rebound rallies in continuing bear markets are typically among the steepest advances the market enjoys. If the rebound does extend, then additional gains of 3% to 5% are well within reach. SPX ended last week just above 4000; climbing into the 4150 – 4200 range on a rebound wouldn’t be unusual. But, until it can move well beyond that level, the rally would still have the look and feel of a rebound in a continuing downtrend. Among the reasons for continuing to expect a lower low are the nature of the Friday rally and the performance of leading sectors. The biggest gainers on Friday included many of the biggest losers year-to-date. Some of those stocks are so washed-out that any rally at all becomes a rush higher through a vacuum. That’s not the kind of participation we would want to see at the beginning of a new uptrend. Also, on both the NYSE and NASDAQ, Friday was the lowest volume day of the week. And, as mentioned above, the sectors that should be leading the market (Technology, Financials, Consumer Discretionary) are still among the weakest. There’s not much on either the economic report calendar or the earnings announcements this week that has the potential to roil the markets. One update that might be a little more entertaining than usual is tomorrow’s Retail Sales report. You’ll see in the table below that big increases over the March numbers are expected.

Date	Report	Previous	Consensus
Monday 5/16/2022	Empire State Manufacturing Index, May	24.6	15.0
Tuesday 5/17/2022	Retail Sales, April, M/M	+0.5%	+0.9%
	Retail Sales ex-Vehicles & Gas, April, M/M	+0.2%	+0.6%
	Industrial Production, April, M/M	+0.9%	+0.4%
	Business Inventories, March, M/M	+1.5%	+1.8%
	Housing Market Index, May	77	75
Wednesday 5/18/2022	Housing Starts, April, SAAR	1.793mm	1.766mm
	Building Permits, April, SAAR	1.873mm	1.818mm
Thursday 5/19/2022	Initial Jobless Claims	203K	197K
	Philadelphia Fed Manufacturing Index, May	17.6	16.1
	Existing Home Sales, April, SAAR	5.77mm	5.65mm
	Leading Indicators, April, M/M	+0.3%	+0.2%
Friday 5/20/2022	Standard May Index and Equity options expire

  Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market.