Bear Market Confirmed

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.

5 thoughts on “Bear Market Confirmed

  1. Bill Terrell says:

    What about bonds? Given that the action across asset classes is being driven by the bond market, it deserves a post of its own. But it’s not that complicated. As noted in this post, it’s all about supply and demand. Trillions of supply need trillions of demand, for which higher yields are required. The Fed is not leading, it’s following.

    Treasuries, as measured by the broad benchmark GOVT, just today took out last October’s lows.

    Again, the issue with stocks is that they have a long ways to go to catch down with bonds. They’re just startlingly overvalued in comparison. Remember how equity bulls justified sky high stock prices because of ultra low interest rates? TINA? There Is No Alternative?

    Well now there is. Interest rates are no longer near zero, but stocks are still priced as though they are. US stocks in particular.

    On top of this, the ten year Treasury, which gets most of the press and is used as a benchmark for stock valuations, is itself overvalued. At least relative to its yield curve neighbors. The ten year closed today at a yield of 4.49%.

    Though the highest in years, (lowest in terms of price), look at the rest of the neighborhood. The five year closed at 4.61. The seven year at 4.57, the twenty year at 4.74, the thirty year at 4.56.

    The ten year is more richly priced than both shorter and longer maturities.

    This is not unusual. The ten year is a popular maturity, in spite of better values both up and down Yield Street. The point is that using the ten year as a benchmark yield for stock valuations itself is generous.

    So US stocks are overvalued relative to the ten year Treasury which is itself overvalued relative to other maturities.


    When Wile E Coyote looks down, look out!

  2. Thrifty says:

    Charles Hugh Smith recently made a great argument for a new bear market due to an inevitable crash in corporate profits. Profits have been at historic highs the last ten years and are likely to revert sharply to the mean. He also points to the evaporation of a few long term factors that fueled the high profit levels, making the high profit levels unlikely to return. When profits crash, stock prices will likely follow them down.

    1. Finster says:

      Good to see you, Thrifty. Adding yet more credibility to Smith’s take on profits is labor growing more assertive. It’s getting hard to keep up with high profile strikes. I see it as a reaction to years of effective Fed subsidies to capital through ultralow rate policy. We’ve commented on this a number times. Consumer price inflation is the last straw.

      Oddly, fiscal policy may be a contributor too, as James Montier of GMO explains:

      The Curious Incident of the Elevated Profit Margins

      In any case, elevated multiples on elevated profits spells double trouble for stocks. US stocks especially. XS (non-US) stocks won’t be immune to a bear market in the US, but far more favorable valuations at least offer something in the way of long term returns for the risk.

      GMO Asset Class Return Forecast

      GMO Asset Class Return Forecast