The start to the second half of the year has been very different from the first half for equity markets. In particular, the S&P 500 Index has gone from posting its second-worst beginning to a year in history to being on track to have its best third quarter in over 90 years. The S&P 500 Index is currently up 10% in July and August, which would go down as one of the best summer rallies ever. As stocks have made back much of their losses from the first half of the year, a bear market rally is in full swing.
That said, the strength of recent stock performance has sparked conversations about whether it really is a bear market rally or the start of a new bull market. As bottom-up investors, we don’t put much emphasis on these comments but do recognize important drivers of these moves. One factor in this rally is the amount of short covering happening in the market. A larger number of hedge funds had to close their short positions, as Goldman Sachs’ basket of most-shorted stocks was up more than 45% since June lows. This short-covering rally seems to be over for now, as the number of shorted stocks has started to come down and it typically creates only a temporary rise in stock prices. In addition, some companies experienced a rally following a mostly positive earnings season that was better than feared.
With the S&P 500 Index rallying almost 14% since June 16 lows, an interesting data point I wanted to highlight is that once the S&P 500 Index has entered a bear market (>20% loss) and rallied back greater than 50% of the bear decline, the Index has never reached a new bottom. Although equity market rallies are not uncommon, this week’s chart shows that a rally of this magnitude (greater than 50% of the decline) has not been followed by a new low.
The question is: Will this remain true? History would say yes, but only time will tell, as the stock market is so volatile, dynamic and nonlinear. There are many factors at play as investors try to figure out where the economy and corporate earnings will go. Inflation, rising rates, negative GDP growth, Russia’s invasion of Ukraine, historically low consumer sentiment and strong employment numbers are certainly top of mind and make stock price predictions very challenging.
The market swings in 2022 have been stark and continue to make history through the third quarter. We take note of these broader equity index moves but certainly do not invest on the basis of broad price movements, as we adhere to a bottom-up approach. The only consistency in the markets is they continue to surprise market participants. This is the primary reason why we continue to focus on fundamentals and identifying individual companies that are executing well. Regardless of how the broader market is performing, there is an opportunity to add value through company-specific earnings, management teams, competitive advantages and balance sheets.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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