June 20, 2022 – A Bear Market is “Officially” Here


A bear market is officially here thanks largely to stubbornly high inflation. For many of us, it has felt like a bear market for most of 2022, but the S&P 500 Index didn’t close more than 20% below its January 3rd record high until Monday June 13th. Tech stocks are down a lot more—the Nasdaq Composite is more than 32% below its November 2021 record high.

It’s hard to find a silver lining in inflation over 8%, but here’s the good news when you look at the economic data; Durable goods saw a rate of inflation that came down quite a bit, which is likely to continue. Also keep in mind that the Federal Reserve’s preferred inflation measure, the core personal consumption expenditure index also known as the PCE is just under 5%; with the next core PCE report due out June 30. The PCE inflation reading factors in product substitutions, making it a better reflection of how consumers are actually coping in this tough environment.

For those worried the Fed may be overly aggressive in its fight against inflation, consider the market, specifically the bond market has done a lot of the work for the Fed already.

  • Home price appreciation has slowed on higher mortgage rates.
  • Lower stock values will likely slow spending.
  • Margin balances have fallen.
  • Wage increases have leveled off as layoff announcements and pulled job openings have started to hit the newswires.
  • The cost of credit has increased based on bond spreads between investment-grade and high-yield corporate bonds.

Financial conditions are already tightening early in the Fed’s campaign. This is all actually good news, since these factors suggest the Fed may take its foot off the accelerator faster than anticipated on its rate hiking campaign in the fall.  Keep in mind a good part of the inflation problem is on the supply side, not demand. The supply disruptions due to COVID-19, China lockdowns, and Russian oil sanctions, show there’s only so much the Fed can do by curbing demand. While some of these supply issues may take many months to resolve. With oil prices being the wildcard, we are still confident that a sizable piece of the inflation problem will get better in the months ahead and patient investors will be rewarded.

So, what should investors now come to expect being in a bear market? For starters, stocks are near their average decline in a bear market without a recession at about 24%, potentially introducing an attractive risk-reward trade-off for stock investors. The job market and consumer balance sheets simply look too strong for a recession to come in the very near term. The Monday, June 13th trading session got us closer to the type of capitulation and indiscriminate selling that has marked prior major lows. The Volatility Index known as the VIX which is the measure of implied stock market volatility rose above 35 on Monday June 13th, very close to the 40 level that has accompanied other major lows suggesting extreme fear and pessimism.  These times are often looked at months later as what would have been very attractive entry levels at or close to market bottoms.

An encouraging statistic to help investors stay the course is after the S&P 500 enters a bear market, the median 1-year gain has been 24% with advances in seven of the past 10 instances back to 1957.  Only 1973 and 2008 saw large deviations from historical averages. But wait, we are in a mid-term election year, where historically the corrections are steeper which we have experienced already; but the average 12-month gain off a midterm election year low is over 30% to the upside.

In closing, don’t forget that lower stock prices can lead to attractive valuations, improving prospects for future returns. It’s so tempting to sell, but history shows us time after time, that after big declines it can be the wrong move.

It’s a great time to review your portfolio allocation, and ensure you are positioned efficiently according to your constraints, objectives, and to maximize the upside potential on the next recovery.

Please contact me if you have any questions.   Stay safe and stay the course.

Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer


40 E Montgomery Ave, 4th Floor Ardmore, PA 19003

Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com

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