In The Bear Is Back we hypothesized that the bear market in stocks, MIA since last fall, had returned. This hypothesis had yet to be confirmed, however. We needed not merely a decline, but a sequence of lower highs and lower lows.
We now have it. The bounce did not exceed the highs. What’s more, the market has moved below the lows recorded in mid-August. The broadest widely available measure of the stock market, VT, closed at an all time high of 109.23 November 8, 2021, and zig-zagged its way down to a low of 78.87 last October 11. That was the initial phase of the bear market.
From there rallied to a peak of 100.59 on July 31. It traded down to 94.94 August 18, back up to 98.07 September 1, and today closed at 94.03. Lower highs, lower lows. This confirms the bear market we hypothesized August 15.
But what does it say about what comes next? By itself, relatively little. Alas, bear markets are only confirmed ex post. A bit more downside would be consistent with the initial leg down, but a rally could easily ensue from here. We have to cast a wider net for more perspective.
In the bigger picture, I believe the trend is lower. The selloff in the stock market has yet to catch up with the record-setting selloff in the bond market. Deficit-driven Treasury supply is driving that, and although there are some signs of budgetary resistance in Congress, they won’t have much immediate effect.
Final inflation is another factor. Goods and services prices lag stock prices, so there is still quite a bit of inflation left in the pipeline. It would take a substantially deeper selloff than what we have seen so far to turn that around. On this basis, the odds are the lows won’t be seen before next year.
Major trends don’t follow straight lines, however, but as a series of dips and rallies decorating the overall trend. Shorter term, seasonals grow more favorable. The second half of September is traditionally a bearish stretch for stock prices. Bottoms often occur in October. If our broader hypothesis maintains, dip buyers and rally sellers would profitably emphasize the latter.