Weekly Update

Up and Down – The Waves of a Bear Market

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Published September 23, 2022


There are thousands of ways to invest. We prefer to remove the emotional component and use mechanical models to drive our investing. Some others like to rely on seasonal cycle analysis. One of those cycles is the four-year presidential election cycle shown below. The second year of the presidential cycle tends to be the worst of the four years. The return historically has been flat through the first nine months of the second year. This year, we are well below that flat historical trend. But the presidential election cycle suggests we are nearing the best performance of the four years. The period from the midterm election to the following May tends to offer outstanding performance. That would be a substantial change in market tone from where we are in today’s market where caution and negative sentiment rule.

S&P 500 4-year presidential election cycle

Such changes in market tone are a normal part of a bearish environment. Bear markets are known for sharp counter-cyclical rallies within the longer-term downtrend. Below is a series of charts showing the waves within a bear market. Many market analysts insist the stock market will need to revisit the June lows. As we go to press, we are only 4% away from those lows. The question then becomes whether we see another one of these down waves. The 2000-2002 and 2008 market declines had FIVE down waves. Is this another one of those bear markets? Or more like those of the 1980s which maxed out at three waves down? We are months away from finding out.

Bear Market waves: current

Bear market waves: 1980


Bear market waves: 1987

Bear market waves: 2000


Market Update

Investors focused this week on yet another Fed meeting expecting a third-straight interest rate increase of 0.75%. Monday’s market showed optimism with a note from JP Morgan suggesting stocks may have seen a bottom. Yield on the Fed-sensitive 2-year Treasury note entered the week at 3.85%. Stocks rolled back over Tuesday with a -1% decline while yields on Treasury bonds kept rising ahead of the Fed announcement. A volatile session Wednesday as investors parsed the Fed announcement. The expected +0.75% was delivered while Fed Chair Powell’s words remained the focal point. Powell reiterated the focus on fighting inflation and that the fight would entail economic pain. Investors fled stocks on the news sending the S&P 500 down -1.7% Wednesday and another -0.8% Thursday. Reports of a sharp decline in European business activity added fuel to the concerns of a global recession Friday to send oil prices down -5%. Stocks tumbled -1.7% while the 2-year Treasury yield popped to 4.21%.

A second week of serious selling in the stock market saw stocks approach their lows for the year. The S&P 500 slid -4.57% while the Nasdaq 100 (QQQ) fell -4.60%. Smallcap stocks plunged -6.53%.

Warm wishes and until next week.