This Ain't Your Typical Bear Market Rally - Or Is It?

The Nasdaq broke its four-week winning streak on Friday (August 19). Up until that point, the index had reached its highest level since April and was enjoying its longest-winning weekly streak since November 2021, even though it was still down 18% or so in 2022. Is this a new Bull Market, or a head fake? Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Bull-Headed Bear?

Last week I toyed with optimism (yeah, I know, hard to believe) recalling the fact that one of the country’s biggest banks was predicting the current stock market rally will not be a typical Bear Market rally – a rally known to lull investors into feeling excited at their prospects and then have the Bear reemerge with great negative intensity.

Instead, JP Morgan, a global leader in financial services, proposed that the bullish rally could very well extend into 2022’s final two quarters. As corporate earnings are revised downward…as they surely will be if recession rears its ugly head…the risk-reward for equities might not necessarily be all bad. The emergence of more reasonable valuations, accompanied by continuing depressed investor sentiment and peaking Fed inflation fighting could be reasons for a bit of bullishness.

Circling Back

Still, my pessimistic inclinations encourage me to “circle back” and remind folks that, though hurtful, the 2022 Bear so far has been relatively mild-mannered and that some of the hardest-hit firms (including many of those who remain unprofitable) have been leading this mid-June through early August recovery.

I can’t help but mention Rivian Automotive, a seller of less than 8,000 EV units since startup (burning billions of dollars in the process) once valued at $155 billion (triple mammoth GM’s currently worth), is up over 100% from its recent low. Their prior $155 billion valuation made absolutely no sense to me. Nor does the 100% surge from its recent lows. After all, there is no shortage of EV manufacturers emerging or on the drawing board.

Market Irrationality

Was it the noted economist, John Maynard Keynes, who said:

“The market can remain irrational longer than you can remain solvent.”

The quote's origin may be questionable, but the statement has proven to be quite true throughout market history.

The problem I have with this bullish trend - the S&P 500 has climbed 17% since mid-June, but is still down about 10% this year - is that it hasn’t enjoyed the old “puke point” stage, one of anguish and gloom that often foretells the beginning of a sustainable rebound. Instead, "buy" recommendations swarm from all quarters…back to 2000 and 2007 market peak levels. That’s very troubling to this old pessimist. I need to see some puking, but instead, I read about what appears to be premature bargain-hunting and optimism. In short, since this Bear began early his year, millions of investors have simply not capitulated. Are all of these “stay put” folks at Vanguard, Fidelity, and the like, ruling the roost this time around?

Not Buying It

One old fellow I listen to isn’t buying into this relatively strong rebound. I won’t mention his name, but he sees the S&P 500 eventually bottoming 40% below its January 3, 2022, peak of 4,818. I hope he’s wrong. Such a downward spiral would require another 30% sell-off from last Friday’s level.

"Oh, that’s not likely this time around," a growing number of folks say. But let me remind all of us that from March 24, 2000, to October 9, 2002 (929 days), the market lost 49.1% of its value. And from October 9, 2007, to March 9, 2009 (517 days), it fell 56.8%. An unpleasant reminder that “The market can remain irrational longer than you can remain solvent.”

Did those peak values we enjoyed in recent years really make economic sense? Rivian valued at three times GM. Peloton, a company that, by the way, never earned a profit, was valued at $50 b-b-billion at its peak. And Tesla, well, what about Tesla? This is the crowd and its cronies that are leading the pack back.

Deep in my heart, I believe this is a bear-market rally, a belief that has solidified since Biden signed the Build Back legislation, also mislabeled as the Inflation Reduction Act. (Yeah, the one that’s going to drive a stake through the heart of inflation.)

In Sum

It’s a complicated world out there, with mixed signals flying all over the place. But if you’ve endured the chaos this long, that’s a good sign that you have confidence in the quality of your diversified portfolio. So, keep investing…on a dollar-cost averaging basis…the cash flow your investments create, and keep exercising the patience and courage required to survive that probable puke point that looms out there.

As I always say: This, too, shall pass.