The stock market has been on a roller coaster ride over the past few months and pretty much the whole of 2022, and investors are wondering whether we are in a secular bear market or just experiencing a relief rally. While there are arguments to be made for both scenarios, it is important to look at the underlying fundamentals to make an informed decision. In this blog post, we will take a closer look at the current state of the stock market and what it could mean for investors going forward.
What is a bear market?
Dow Jones Industrial Average and S&P 500 are widely used to gauge the market’s overall health. However, the Russell 2000 is an important index that is often overlooked.
The Russell 2000 index of small-cap stocks is an excellent indicator of how these companies are performing. Small-cap stocks are usually more volatile than large-cap stocks and can be a leading indicator of the direction the market will take. In general, when small-cap stocks perform well, it indicates that the market, in general, is healthy. However, when small-cap stocks begin to underperform, a bear market may be on the horizon.
When the stock market experiences a sustained decline in prices for a prolonged period of time, a bear market is defined. When there is a recession or when investors fear an impending recession, bear markets typically occur. Bear markets can last weeks, months, or even years. Investors tend to sell off their stocks when they become worried about the future of the economy, resulting in lower prices.
What are Bear Market indicators?
When trying to assess whether the stock market is in a bear or bull phase, there are several indicators investors can use. The direction of the Dow Jones Industrial Average (DJIA) and S&P 500 index is especially important. Generally speaking, if either of these indices is moving higher, it points toward a bull market. Conversely, if either is heading downward, it is indicative of a bear market. The interest rates are calculated to predict the direction the stock market is headed – rising rates represent bullishness while falling rates represent bearishness.
Dead Cat Bounce? Key Highlights
1. The bear-market rally has caused immense pain for shorts
2. A basket of the most-hated stocks has jumped 4% recently, extending the new-year rally
3. The S&P 500’s up-day median gain in 2022 was the largest since 1938
4. Many investors are still sceptical about the market’s current state
5. Some experts believe that this rally is simply a “dead cat bounce”
6. Only time will tell if this bear market is truly over
2022 vs 2023
Financial markets had a dismal year in 2022 after the Federal Reserve hiked interest rates to combat inflation; 425 basis points of rate hikes were instituted. Although the December jobs report saw unexpectedly robust payrolls, Fed officials are not convinced that the slowing of economic growth is taking place and continue to keep rates restrictive.
Experts caution that if unemployment should reach 4.7% by 2023 as it’s currently predicted, this could catalyze a recession. Wall Street analysts forecast bear markets in 2023, with corporate earnings expecting up to 25% losses in the S&P 500 in the first half of next year due to overly optimistic estimates.
1st Key Indicator which will tell the outcome- Inflation
Last year, increased inflation prompted the Federal Reserve to raise rates, resulting in a decline in the stock market, especially among growth stocks that had been priced for potential returns. For the Fed to scale back on rate hikes and revert them closer to pre-2019 levels, inflation must be reduced towards the target of 2%, as noted by Federal Reserve Chair Jerome Powell. To determine how close or far away from that goal inflation is at any given time, it’s important to pay attention to what indicator the Fed follows – personal consumption expenditure (PCE).
According to the December projections by the Federal Reserve, they expect the PCE index to drop down to 3.1% by 2023. If data shows that PCE is trending below this level throughout 2021, this should have a positive impact on stocks and crypto assets.
2nd Key Indicator which will tell the outcome- Interest Rates
Interest rates have been a major topic of discussion in forex trading and currency markets over the last year. The federal funds rate has been raised from 4.25% to 4.50%, but this is just one of many interest rates that impact stocks, with an inverse relationship between bond yields rising and stocks falling, and bond yields falling and stocks rising. Despite the forecast for an additional 75 basis points in rate hikes for this year, however, the interest rate on the benchmark 10-year
Treasury Note has fallen from its October peak of 4.33%, all the way down to 3.45%. This suggests that investors believe the risk of prolonged elevated rates may be waning, and further indicates more favourable conditions for stock investments. Furthermore, a decrease in inflation has likely contributed to this shift in interest rates as well.
3rd Key Indicator which will tell the outcome- DXY
The U.S. Dollar Index (DXY) witnessed remarkable growth in 2022, with a 7.5 per cent uptick recorded over the calendar year across Forex trading platforms. This beat assets like gold, which is traditionally considered an inflation hedge and better performing than stocks in the global financial market.
As such, Forex analyst, Abbas Gayed suggested that investors re-evaluate their mindset when looking to commit funds towards US investments and consider alternatives such as emerging markets ETFs. He noted that these may not have tech-based components but could still cater to value sectors or commodities.
How to invest in a bear market
When the stock market is in a bearish phase, investors may lose confidence and become discouraged. In a bear market, investors can find investments that will pay off when the market eventually recovers by being patient and strategic.
Here are a few tips on how to invest in a bear market:
1. Look for companies with strong fundamentals. In a bear market, stock prices can be volatile and companies with weak fundamentals may not survive. You can avoid many of the pitfalls of a bear market by investing in companies with strong balance sheets, earning power, and growth potential.
2. When the market recovers from a bear market, you may be rewarded handsomely if you wait for the right opportunity.
3. If you have faith in your investment strategy, stick with it even when times are tough. It can be tempting to sell everything when the market is down.
4. Consider alternative investments. In a bear market, stocks aren’t the only game in town. There are other types of investments that can perform well even when stocks are struggling. For investors looking beyond stocks, there are plenty of options.
Dollar index indicator: What to buy in a bear market?
There are a few things you should keep in mind when investing in a bear market. First and foremost, you should focus on buying quality companies with solid fundamentals. You should also search for companies with good upside potential and that are undervalued by the market.
A dollar index indicator can be used to locate undervalued companies. This indicator measures the strength of the U.S. dollar against a basket of other currencies. When the dollar index is low, it means that the U.S. dollar is relatively weak compared to other currencies. Due to the relative weakness of the dollar, foreign investors may be looking for U.S.-based companies to invest in.