Can the Secular Bull Overcome the Cyclical Bear?

The stock market has had a fairly wild ride in 2022. Due to a war in Ukraine, rising inflation and a sudden reversal of years of loose monetary policy, stocks ended the market in June, while the S&P 500 Index was down more than 20%. from its peak. Since then, the index has pinwheeled up and down, surging 9.2% in July but falling 4.2% and 9.2% in August and September, respectively, before rallying 8.1% in October. In November stocks are continuing their upward momentum, rising just over 3% in the first half of the month.

Despite its recent rally, the S&P 500 is still down 16% year to date. While it’s hardly been a breakout year for stocks, that doesn’t necessarily indicate a secular bear market. Indeed, while many analysts have lamented the state of the market recently, not everyone agrees that the downward trend is a sign of a secular bear market. Rather, it could be that investors are dealing with a purely cyclical bear market, one that will be short-lived and quickly overtaken by the all-out secular bull market.

Cyclical or secular?

In August, wealth manager and Bloomberg podcast host Barry Ritholtz called a cyclical bear within a longer secular bull on recent reversals. In other words, the stock market’s decline over the summer was the result of a short-term recession, not a sign of a long-term shift in market momentum away from growth. Ritholtz has maintained this stance in the months since, tweeting on November 10:

We are in a secular bull market from Summer 2020; sell off this year = cyclical bear within secular bull broader than full-on secular bear market. You don’t know what a cyclical bear will end up with but a huge bullish on a huge + above average breadth is a good start.

According to this view, investors are too fixated on what is ultimately a short-term, cyclical bearish swing within a broader secular bull market. Ritholtz expanded on his position in a blog post, citing the Nasdaqs’ 7.4% one-day rise on November 10 as an indicator of a possible positive breakout:

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About 25% of the time, these huge moves represent a reversal of the previous trend. This means that in about 1 out of every 4 times, a huge move up in the Nasdaq ends the previous downtrend and begins a much more positive period. That’s not enough to rely on as a trading rule, but it should be enough to get your attention.

The historical strength of the indicator is certainly worth considering, in my opinion. However, the increased volatility of the market makes any directional trade based on it difficult to count. So far, it’s impossible to say whether last week’s rally was enough to buck the market’s cyclical trend. Furthermore, it is not entirely clear that the bear market is merely cyclical.

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Sailing through the volatile waters of the market

Current market concerns can hardly be irrational, given persistent inflation, rising interest rates and growing geopolitical tensions. Any or all of these could come together to fuel market turmoil, both in the short and long term, according to Rob Haworth, senior director of investment strategy at US Bancorp (NYSE:USB). In a market update on November 8, Haworth advised investors to expect significant volatility in the near term:

The market was likely to get worse and lower regardless, and over time, the markets have shown that they are capable of recovery. still facing the market given the current economic fundamentals.

There is no doubt that the economy is more fragile than it has been in recent years, so there are many potential difficulties ahead. Policy decisions from the Federal Reserve could have major implications for the stock market in particular, as Tom Hainlin, national investment strategist at US Bank, said in a November 8 note:

The economic data we’ve seen, like healthy jobs reports, point to a material risk that the Fed continues to raise rates. If this further slows the economy, dampening corporate profits, investors may not be willing to pay such high prices for stocks. But at this point, the Fed could be looking at even a modest retreat.

This reality has clearly been accepted by the market, as demonstrated by heightened investor anxiety and market volatility. That concern is quite reasonable, in my view, given the state of the macroeconomic and geostrategic environment in which market participants must play.

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My take

In my assessment, it is still too early to tell whether Ritholtz is right about the nature of the bear market. After all, bear market rallies can look deceptively like emerging bull markets, as economist Adam Hayes noted:

The deepest bear markets have created the biggest bear market rallies in the past. After the Stock Market Crash of 1929, the Dow Jones Industrial Average went on to decline 48% from mid-November to mid-April 1930. From there, the Dow fell 86% by the time the bear market hit rock bottom. . in 1932.

Stocks have struggled to stay buoyant during the growing market storm. It may be overly optimistic to bet on a quick return to calmer market conditions given the macroeconomic overhangs that still exist.

This article first appeared on GuruFocus.

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