Stock Markets Are Surging. Is This A Bear Market Rally?

The coronavirus pandemic has had a devastating impact on the United States. Over 100,000 Americans have lost their lives, more than 40 million Americans have filed for unemployment and the economy is at risk of entering recession. The crisis has also ended a historic stock market bull run that lasted over a decade…

While the other impacts of the pandemic will take a long time to heal, the stock market has already recovered a significant portion of its losses. The rally has lifted markets in a remarkably short period of time—but the stock market surge isn’t an unprecedented event.

Past bear markets have seen stock market bounces of similar magnitudes, and historical bear market rallies can last for long periods of time, some up to two years. So is the stock market rally of today a bear market rally, or are we seeing a full recovery?

What Is a Bear Market? What Is a Bear Market Rally?

A bear market is commonly defined as a 20% decline in the stock market from an all-time high. A bear market rally is a period during a bear market when stock prices bounce higher before reversing and heading back to fresh lows.

Bear market rallies are characterized by a sense of hope that markets are heading back toward their highs, signaling a recovery and potentially a new bull market. These upward spikes can happen over and over again during a bear market. Eventually, one does break through, leading to a fresh bull market.

The S&P 500 has seen it’s fair share of bear market rallies. Since the crash of 1929, which helped cause the Great Depression, the S&P 500 (and its predecessor index) have witnessed 14 separate bear market rallies. The phenomenon has become more prevalent in recent years, according to Bloomberg’s calculations. Since 2000, there have been five bear market rallies.

Here’s the thing about bear market rallies: They’re deceitful, because they can be long-lasting. Bear market rallies can go on for weeks or months before the market heads south again and bottoms out. According to Bloomberg, bear market rallies since the end of 1927 have lasted an average of 627 days before indexes dropped lower and bottomed out. By Bloomberg’s count, the longest was 1,616 days, and the shortest was 133 days.

In the midst of a bear market rally, it’s easy for investors to get a false sense that markets are recovering from a harsh blowout. And then they crash again.

Is the Stock Market In a Bear Market Rally Today?

The early stages of the coronavirus crisis had a severe impact on the stock market. Things started deteriorating in late February, when the pandemic reached U.S. shores, and the selling accelerated in March when domestic rates of infection surged and states began closing down their economies.

On March 12, the Dow Jones Industrial Average (DJIA) and S&P 500 officially entered bear market territory, as both indexes sped past 25% losses from their all-time highs in February. As of writing, we’re still in that bear market. The declines ended a historical bull market that had lasted 11 years, the longest in U.S. history.

Since late March, there’s been an immense amount of volatility in markets. Stocks rallied by more than 20% as investors took heart from the fiscal and monetary policy measures put in place to carry the economy through the pandemic. Not least of these has been a boatload of new Federal Reserve lending programs and the $2 trillion federal stimulus package. Good news from human coronavirus vaccine trials has also played a role in buoying confidence.

Experts Warn the Bear Market Could Last Longer

The recent stock market bounce could leave you with the impression that markets have achieved escape velocity and are heading straight back to February highs. But many analysts and traders warn that the gains may be temporary. According to a survey by Bank of America Global Research, 68% of global fund managers believe we’re seeing a bear market rally—not a recovery.

Todd Lowenstein, chief equity strategist at HighMark Capital Management, believes we’re not free of the bear market quite yet.

“There’s huge evidence to support that,” Lowenstein says, emphasizing that the overwhelming majority of bear market rallies have retested the lows. “History is usually a guide. You want to look at past cycles and see how markets have behaved, how the economy has behaved, to get a sense of what’s going on now.”

Some experts argue that an increase in day trading due to commission-free trading, stimulus checks and the sole fact that Americans have more time on their hands as they’re locked down at home are contributing to the recent comebacks in the stock market.

CNBC commentator Jim Cramer has recently said that without another federal stimulus package, he worries the market will soon “sputter out.” But those same experts warn that these factors aren’t enough to carry the stock market back to where it was four months ago.

What Is Driving the Bear Market Rally?

Lowenstein says that until recently, a handful of stocks, mostly in the technology industry, were pushing the rallies forward. This skew is causing the stock market to react in ways that do not reflect the real economy—where over 40 million Americans have filed for unemployment since the pandemic began. He notes that consumer sectors, like retail and travel, aren’t adding much to these rallies.

“This tells you it’s a narrow rally, it’s not broad,” Lowenstein says. “To see if the market is truly sustainable, you want to see broad participation, not what we’ve seen so far.”

Bear market rallies can spook retail investors. Seeing the stock market crash, many retail investors might be tempted to sell before they incur anymore losses. Once they see the market spike higher, they might feel the need to get back in the game, in worry of missing out on some profits.

How Should You Invest In a Bear Market Rally?

Joe Duran, head of Goldman Sachs Personal Financial Management, calls this cycle of emotional reactions to short-term market moves a dangerous approach that investors should work to avoid.

“Now is not the time to be an emotional investor,” Duran says. “Emotional investors will be worried about missing out on the rest of what they think might be the recovery. But you should never try to recoup past bad decisions. You have to let go.”

Instead, Duran tells retail investors to…

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