Pre-market stocks: Why the impending bear market will be different

Quick reminder: A “bear market” refers to when stocks fall 20% or more from their recent high. They are a sign of extremely negative sentiment on Wall Street and are more serious than a sell-off.

Since World War II, the S&P 500 has seen 17 bear or near-bear markets, according to analysis by Ryan Detrick of LPL Financial. Issue 18 is almost certain to arrive soon.

“The bad mood has been lingering,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote to clients earlier this week.

Historically, when the S&P 500 entered a bear market, the average decline was nearly 30% and lasted nearly a year.

This period is painful, but it does not last forever. Importantly, bear markets have not always been precursors to recessions in the United States.

“In 1987 we had a bear market and no recession, and earnings continued to rise,” Edward Yardeni, president of Yardeni Research, told me. “That could very well turn out to be the environment we find ourselves in right now.”

Still, economists and investors acknowledge that the risk of a recession will increase as inflation eats away at consumer spending and the Federal Reserve continues to raise rates in an effort to combat the problem.

“The odds have increased throughout the year,” said Darrell Cronk, president of the Wells Fargo Investment Institute. His team now thinks the U.S. economy is more likely than not to contract later this year and into early 2023, he added.

What happens next? It’s easy for every bear market to feel like the end of the world, as nervous traders gaze anxiously at a sea of ​​red. But to date, every huge bust has been followed by an even bigger rally. It’s just a matter of when the recovery will begin.

This time around, that moment is much harder to predict. Usually, a bear market bottoms out when the Fed decides its job is done and eases policy. But with inflation rising at the fastest rate in decades, the central bank has signaled that it intends to remain hawkish for some time.

“For his credibility, he has to stay the course here in terms of reducing inflation,” Yardeni said.

In addition to raising rates, the Fed will soon begin the process of selling the bonds it has purchased in recent years, another mechanism to stimulate the economy. This hasn’t been done in a very long time before, making it harder to discern what the market response will be.

“The only time they really did it with intent was at the end of 2018 and they abruptly and quickly stopped that as growth resumed in early 2019,” Cronk said.

It is therefore difficult to find a useful precedent for the bear market.

“There aren’t a lot of good models to use,” he continued.

China floods its struggling economy with support

China took significant steps on Friday to save its sagging housing market and avoid a major slowdown in the world’s second-largest economy.

The People’s Bank of China cut its five-year prime lending rate – a key interest rate – by 15 basis points to 4.45%, the second cut this year and the largest on record. Most analysts were expecting a five basis point cut, reports Laura He, my colleague at CNN Business.

China’s so-called “LPR” is the rate at which commercial banks lend to their best customers. It is used as a reference for other loans and the five-year maturity is generally used as a reference for mortgage loans.

The central bank’s decision to cut the five-year rate is the latest in a series of steps China has taken to deal with a housing crisis as Covid lockdowns threaten to push the economy into its first contraction quarterly since the beginning of 2020.

Sales of new homes fell 47% in April from a year earlier, the National Bureau of Statistics said earlier this week, while prices in 70 cities fell for an eighth consecutive month.

Zhaopeng Xing, senior strategist for China at ANZ Research, called the move a signal that executives want to support the struggling housing sector “as soon as possible”.

“It also suggests that China is pushing hard to meet its 5.5% growth target” for 2022, he added.

Take a step back: China’s economy could contract in the second quarter as Covid lockdowns weigh heavily on output. Consumer spending and industrial production fell sharply last month, while unemployment hit its highest level since the first coronavirus outbreak in early 2020.

The real estate sector, which accounts for up to 30% of China’s GDP, is also facing a deepening crisis.

Evergrande – one of the biggest developers in the country – is undergoing a huge restructuring after defaulting on its massive debts late last year. Analysts have long feared that Evergrande’s collapse could ripple through the real estate sector.

People just buy candy and liquor

In the UK, inflation is at its highest level since 1982 and growth has stalled, a toxic economic cocktail.

But there is good news: the British are still shopping.

The bad news? They spend their money on alcohol, sweets and tobacco, a sign that people are spending more time at home as their spending increases or they seek out inexpensive treats.

Breakdown: UK retail sales rose unexpectedly in April, the government said in data released on Friday. Inflation hit a 40-year high of 9% in the same month.

But dig into the data, and it’s a lot less rosy. Yes, sales at food stores increased, but that was boosted by purchases of alcohol, cigarettes and candy. It’s hard to argue that stress eating and other indulgences reveal binge consumers.

“Don’t be fooled by April’s rebound in retail sales,” said Niraj Shah of Bloomberg Economics. “The biggest squeeze on incomes in a generation is expected to further limit consumer spending in the months ahead.”

Investor View: Concerns about the UK economy caused the pound to crash. The currency is down almost 8% against the US dollar since the start of the year.

Following

Deere (OF) and Foot locker (Florida) publish the results before the opening of the American markets.
Coming next week: Earnings season wraps up with results from Petco, Nordström (JWN), dollar tree (LTRD), Nvidia (NVDA), Ali Baba (BABA), Macy’s (M) and Costco (COST).