In our view, the first leg of the bear market, which was driven by declining valuations, ended on June 16th, when stocks were extremely oversold, and investors were fearful. Then, non-fundamental factors and the false "Fed Pivot" narrative fueled a sharp eight-week bear market rally that ended on August 16th. Currently, stocks are in the second leg of the bear market, driven by a weakening economy and declining corporate profits.
The first leg of the bear market ended in mid-June, and the eight-week 18.9% bear market rally is over. We believe stocks are poised to decline as the economy slows and corporate profits disappoint. In this recessionary environment (declining growth and inflation), we believe the market's defensive sectors (healthcare, staples, utilities, and value) will outperform. Also, we expect long-term treasury bonds and gold to help hedge the portfolio's equity exposure.
The bear market accelerated in June as the Fed aggressively raised interest rates to fight inflation, which is at a forty-year high. The S&P 500 declined by 8.4% in June and finished the first half of 2022 down 21%, which was the worst first half since 1970.
The stock market decline continued in May, and the S&P 500 “officially” entered a bear market on May 20th by falling more than 20% from its January all-time high. Interestingly, the S&P rallied 8.4% off its May 20th low to finish flat for the month.
After a difficult Q1, the selloff in the financial markets accelerated in April because of the extended war in Ukraine, the supply chain issues related to the lockdowns in China, and the Fed's "promise" to raise interest rates quickly to curb inflation. Additionally, stocks suffered in April as disappointing earnings from Netflix and Amazon indicated that surging inflation could be hurting consumers.