On Friday with the S&P 500 down 2.9% on the day and off 18.7% from its all-time high on January 3rd, the bear market entered the anger phase. Similar to the Kuber-Ross stages of grieving, bear markets have three phases: denial, anger, and acceptance. With the release of the May CPI data which disclosed that headline inflation on a year-over-year-basis increased by 8.6% and core inflation rose by 6%, markets could no longer deny the fact that a broad-based inflationary process is now underway. (See: https://shulmaven.blogspot.com/2022/01/way-too-complacent-about-inflation-and.html) Further with the all-important housing component lagging economic reality, the inflation we are now experiencing will have a long tail.
In response to the data the yield on the 2-Year note
popped to 3.07% and the 10-Year yield hit 3.17%, just shy of its recent high.
Put bluntly the bond market is now signaling that the Fed Funds rate is well on
the road to, at least, 3.5%. That along with quantitative tightening could very
well trigger a recession in 2023. Time will tell whether or not a recession
pans out.
Nevertheless, in the anger phase of a bear market, the
stock market will shoot first and ask questions later. It is my guess that
stocks will quickly fall below the intraday low of just above 3800 on the
S&P 500 making a bear market official to those who mindlessly invoke the 20%
rule to define a bear market. As we have written before, it is obvious that we
have been in a bear market for some time. (See: https://shulmaven.blogspot.com/2022/05/we-are-in-bear-market.html)
The anger phase of a bear market can either be short
or long, but it is usually severe. That will ultimately give way to an acceptance
phase which can grind out for years. Again, as we have previously written we
are likely to be in a new 13-year cycle that will be characterized by a long
and drawn-out trading range. (See: https://shulmaven.blogspot.com/2022/05/the-useconomy-is-entering-new-thirteen.html )
No comments:
Post a Comment