Kerry Craig

Macroscope | US bear market rally is in full swing, but how long will it last?

US stocks have made back much of their losses from the first half of the year, and there are signs that the rally in equity markets still has a way to go

An examination of factors such as policy, positioning, price and profits might help answer whether we are heading for a bull market, or if the lows will be tested again

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A trader works during the opening bell at the New York Stock Exchange on August 16. Photo: AFP

Kerry Craig

Published: 11:30am, 19 Aug 2022

The second half of the year has started very differently from the first. Bond yields are behaving themselves and equity markets are rising. Since the low on June 16, the S&P 500 has risen more than 15 per cent and unwound close to half of the peak-to-trough drop during the first half of 2022. The bear market rally is in full swing.

Equity rallies during periods of overarching market weakness are not uncommon, and there can be multiple rallies even during a more prolonged downturn. Analysis by J.P. Morgan of the past five major US equities’ bear markets showed that the market rallied by more than 10 per cent on average five times during those bear markets.

So will this rally become a bull market, or will the lows be tested again? Using a framework of four Ps – policy, positioning, price and profits – might help in answering that question.

On policy, the aggressive change in tone on inflation and getting interest rates quickly back to a neutral level were the most significant factors behind the weak performance across stock and bond markets in the first half of the year.

The pain was most acute in equity markets, where things looked most overvalued. These high valuations became tenuous as risk-free rates rose and expected future earnings were discounted at higher rates, making them worth less in today’s money.

Central banks are still focused on bringing down inflation, but it appears to have peaked, at least in the United States. The combination of weaker demand and falling commodity prices is helping to slow price rises.