Beware of a ‘bear trap’ pullback in equities after big summer rally, strategists warn

Beware of a ‘bear trap’ pullback in equities after big summer rally, strategists warn

It looks like a “bear trap” may be lurking in this summer’s big jump for the stock market, which could lead to painful losses for investors, warned Glenmede strategists in a report on Monday.

Investors already appear to be reconsidering some factors in this summer’s powerful recovery, including rethinking hopes that the Federal Reserve may not raise interest rates as aggressively as previously thought.

The S&P 500 SPX index,
-2.14%
has been hitting resistance after gaining nearly 17% from its mid-June low, and focus has lately turned to whether recent equities gains can quickly fizzle out, confirming a bear market rally.

This may sound like an aberration, but Glenmede’s investment strategy team found four instances of multiple bear market jumps (see chart) in US equities over the past 50 years when examining periods after the S&P 500 initially dropped by the minus 20% of its previous peak.

Bouncy Bears Are Not That Rare

Glenmede investment strategy, set of facts

Of the last six bear markets, four produced a series of short-lived rallies that averaged 6.5 upswings. The S&P 500 confirmed its entry into a bear market on June 13.

“The 17% rally from the June 16 low appears consistent with historic bear market highs, returning on average over 17.8% before reversing course and hitting new market lows,” Glenmede’s team wrote. , in a note to the customer on Monday.

“While the economic downturn has not yet been confirmed, the way forward will depend heavily on different inflation and interest rate outcomes.”

Stocks were down earlier in the week, with the S&P 500 down about 2% at last check after closing Friday 15.3% below the 12-month low of 3,666.77 set on June 16, according to Dow Jones Market Data.

The Dow Jones Industrial Average DJIA,
-1.91%
fell 1.98% on Monday, dropping more than 600 points, while the 10-year Treasury yield TMUBMUSD10Y,
3.015%
was back above 3%. Higher benchmark lending rates can lead to slower economic growth, making loans to US businesses and individuals more expensive.

Economists expect Federal Reserve Chairman Jerome Powell to emphasize this week in his speech at Jackson Hole that a 2% inflation target remains the main focus, even if trying to achieve it means triggering a recession. The inflation rate for the 12 months ended in July dropped to 8.5%, from a 41-year high of 9.1% in June.

But federal officials warned in July that the US central bank could adopt a “restrictive” policy stance, enough to slow economic growth, as it works to bring inflation down from its highest levels in decades.

To read: Here are 5 reasons why a rally in stocks could be about to turn into a bear market.

On the bullish side, however, there is hope that consumer prices may have finally peaked this summer and corporate profits and consumer spending have remained quite strong, Glenmede’s team said.

Even so, “markets continue to price in a relatively optimistic earnings outlook as earnings continue to increase over the next three years.”

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