Countertrend rallies are characteristic of secular bear market downtrends, and from that perspective, 2022 has been remarkably similar to previous bear markets in history. Until inflation abates and the Federal Reserve rebalances its priorities away from inflation and toward growth, tempting rallies are likely to remain unsustainable.

Bear market rallies
S&P 500 level, annotations highlight percent gain from the beginning to the end of each bear market rally

Two line graphs showing bear market rallies, from September 2007- March 2009 and from December 2021-August 2022, from the beginning to the end, annotating the highest percent gains

Standard & Poor’s, Bloomberg, Principal Global Investors. Data as of August 3, 2022.

Bear markets—equity market declines of 20% or more—are typically littered with volatile trading ranges which exhibit lower highs and lower lows. Bear market rallies, therefore, are the short-lived upward trading ranges during such secular declines, whereby technical factors drive markets higher for a temporary period, before deteriorating fundamentals reassert themselves, prompting renewed equity market declines.

The increase in European gas prices has been particularly sharp. Since January 2021, natural gas prices have risen almost 760%, significantly more than the 240% increase seen in the U.S. The surge is deeply impacting Europe’s economy, pushing inflation to record highs, driving up household bills, and straining Europe’s industrial sector.

The protracted down markets of 1973-1974, 2001-2003 and 2008-2009 each experienced multiple bear market rallies, while this year’s bear market has experienced five through August. The latest, starting in mid-June, has seen the year-to-date equity market decline diminish from 24% to just 13%. While this represents a sizeable gain, it is, in fact, exactly in line with the average magnitude of bear market rallies in previous cycles.

Just like the previous four rallies this year, the current one is unlikely to be sustained. Core inflation remains very elevated and will decline only slowly and, with the Fed continuing to emphasize prioritization of inflation curtailment over growth concerns, significant further monetary tightening is likely. As the economy slows, earnings downgrades may also precipitate a re-evaluation of the current market rally.

2022 is proving to be a typical echo of previous bear markets in history—including the hopeful, yet inevitably humbling, temporary rallies. Until fundamentals improve, investors should not place too much faith in sharp, but temporary, bear-market rallies.


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