Zacks Investment Management

Dean T. from Frederick, MD asks: Hi Mitch, I’d like to hear your thoughts about the end of the bear market and the beginning of a new bull. Specifically, what conditions do you think need to be met for the market to officially reach a trough?

Mitch’s Response:

Thanks for your question. Everyone surely wants to know when the bear market will end and a new bull will begin. Unfortunately, we will only truly know the answer with the benefit of hindsight, likely several months into the new bull. Bear market rallies are common, so what feels like a new bull may just be a temporary bounce that fizzles out after a few weeks or months. We saw that already this summer with the July-August bear market rally, for instance.¹

So, while I cannot perfectly pinpoint when the bear market will end – assuming it hasn’t ended already – I do have some thoughts for you regarding conditions that need to be met.

The first condition is a clear and sustained signal that inflation is trending lower. The Federal Reserve’s preferred measure of inflation is the Personal Consumption Expenditures (PCE) index, which posted a September year-over-year inflation reading of +6.2%, is well above the Fed’s 2% average target. Inflation was unchanged from August and is lower than the summer months, which at least indicates inflation is not getting worse. The Fed needs it to go lower faster, however.

How Can You Protect Your Investments Until the Bear Market Ends?

Navigating through a bear market is not easy for investors. And as fearsome and unpredictable as it seems, you can potentially avoid the most harmful aspects of a bear market and prepare your investments for what’s to come.

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• Understanding how bear markets work, and how long they last
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One of the fundamental problems with inflation, however, is that it is very tricky to accurately measure. The Atlanta Federal Reserve compiles a list of the various inflation measures tracked across the marketplace and at Fed banks, and there is a total of nine inflation indexes on their list. Yes, nine. There is no question that inflation is a problem no matter which measure you use, as inflation readings range from 4.7% on the low end to 7.3% on the high end. But getting inflation from 4.7% to 2% is a lot different than moving it from 6.2% to 2%, which brings me to the second condition I think is needed for the bear to end: a recession.

If we see prices start to come down across the economy as we get confirmation that the economy is contracting, these conditions would significantly raise the probability of the Fed suspending or reversing their monetary tightening efforts. Now, to be fair, I do not think stocks are currently priced for a severe recession, so if the Fed goes too far with rate increases and the economy collapses more than investors are currently anticipating, then the bear market could endure another down leg before finding a low. I do think stocks are currently priced for a mild recession, however, so confirmation of that recession with moderating inflation would be enough to end the bear.

It may very well be that we’ve already reached that point – stocks are trading off October lows and I’m seeing several signs that inflation pressures are set to ease in the coming months. Recession indicators like the 3-month/10-year Treasury yield curve and the Conference Board LEI index are also suggesting a mild recession could be around the corner, which may arrive just as inflation pressures ease – a major positive for stocks, in my view.

It’s important to remember that volatility is a natural (if unpleasant) part of the economic cycle. Instead of giving into fear and falling prey to common mistakes, you can avoid the most harmful aspects of a bear market by making use of some useful tools in our free guide, “The Zacks Bear Market Survival Kit.”³ These tools include:

• Understanding how bear markets work, and how long they last
• The strategies we believe are most effective for mitigating downside over time
• The most harmful thing investors do in a bear market, in our opinion
• Plus, more ways to potentially survive a bear market and achieve your long-term goals
   

If you have $500,000 or more to invest, get our free guide today. You’ll get our viewpoint on the most important moves you can make to weather a bear market. Don’t wait—get this guide today!

Disclosure