Inside Markets — Disciplined Approach

The most recent bear market occurred in 2022 as the Fed ramped its hiking campaign.  The market experienced five drawdowns in the 9-17% range in ’22 and four reflex rallies ranging from 5-16% before reaching a bottom in October. This is still an event-driven bear market, which tends to be the shortest in duration and usually records shallow peak-to-trough drawdowns of ~25%. But event-driven bear markets can evolve into cyclical bear markets, which last longer and have larger drawdowns >30%. For this reason, we expect markets will be extra sensitive to any macro data that supports a recessionary narrative. Reflex rallies usually last only 1-2 weeks. The current rally can push into next week if the US dollar can regain its footing, bond yields move lower and early Q1 earnings continue to come in ‘better-than-feared’. One or two trade deals with G8 countries (Japan/UK) would force us to rethink the near-term playbook, especially if it pushes the SPX back above ~5500. And a sustained close above 5650 would wipe out recent bearish signaling.