Wall Street took a deep breath Monday, with a gleeful relief rally bubbling up despite the cloud of uncertainty that has cast a pall over much of 2022 trading.
The Dow Jones industrial average closed up more than 600 points, nearly 2 percent, as the blue-chip index attempts to shake off an eight-week losing streak, its longest in nearly a century. The broader S&P 500 advanced nearly 1.9 while the Nasdaq gained nearly 1.6 percent.
The S&P 500 remains on the precipice of a bear market, defined as a 20 percent fall from the most recent high, having dipped into that terrain Friday before squeaking out a late reprieve. The technology-heavy Nasdaq is already down more than 27 percent for the year, and the Dow is off more than 12 percent.
Markets loathe uncertainty, but the year so far has been rife with it. Economic conditions were already expected to get tougher this year, as the sugar-high from unprecedented government stimulus that set off a streak of record profits in earlier in the pandemic has faded. But businesses also have been confronting an array of challenges, from decades-high inflation to the evolving consequences of the war in Ukraine.
Veteran investors, sensing that the markets are coming to the end of a powerhouse growth cycle that started earlier in the pandemic have begun searching for signs that the bottom is approaching. Until then, the long view suggests that when weakness surfaces in markets, there is opportunity, according to Ryan Detrick, chief market strategist of LPL Financial.
“There have been a lot of bear markets over time, but one thing that has always happened is stocks have eventually come back to new highs,” Detrick said Monday in commentary. On average, stocks take about 19 months to recover their bear market losses, he added, but the past three bears have been much shorter, recouping losses within five months.
The focus on the Federal Reserve has driven much of the market volatility. The central bank must walk a fine line when it comes to taming inflation, ideally raising rates enough to bring prices down without tipping the economy into a recession, which generally is defined as two consecutive quarters of falling economic activity.
Soaring costs are cutting into business profits and forcing households to spend more at the gas pump and grocery store. Last week, Treasury Secretary Janet L. Yellen warned that “higher food and energy prices are having stagflationary effects” and “depressing output and spending and raising inflation all around the world.”
Fresh data on consumer sentiment later this week will give investors a better sense of how those pressures are affecting American consumers, whose spending accounts for roughly 70 percent of gross domestic product.
With the Fed intent on raising interest rates to ease inflation this year, as it already has signed off on two of seven rate hikes expected in 2022, borrowing could become more expensive for corporations and households.
Shares of JPMorgan Chase, the largest lender in the country, climbed 6 percent Monday after it lifted its yearly outlook for net interest income to $56 billion, saying it expects to benefit from higher interest rates in the coming year. Other bank stocks also got a lift, with Citibank gaining 6 percent and Goldman Sachs advancing 3 percent.
Russ Mould, investment director at AJ Bell, said he sees the “classic” phases of a bear market forming as investors come to grips with the onslaught of challenges to the growth that stocks have enjoyed since the short but significant downturn they suffered when the coronavirus first brought the global economy to a halt. Pandemic favorites have seen their shares tumble in 2022, with Microsoft down 25 percent, Netflix 68 percent, Peloton 58 percent and Zoom 53 percent.
Bull markets “crack at the periphery first,” Mould noted in commentary Monday. “Trouble then filters through to core assets as confidence wanes.” These cracks have been forming for a while, with their influence impossible to ignore in more speculative areas of the market, such as cryptocurrency, Mould said, pointing to the stunning fall of bitcoin. The digital coin is trading below $30,000, down 38 percent this year and less than half of its November peak near $67,000.
SPACs, or the “blank-check” companies that became immensely popular in recent years with one used to launch a social media platform of former president Donald Trump, are “performing poorly,” Mould said, and new transactions “are getting a cool reception.”
Last week, signs of genuine panic surfaced after disappointing earnings reports from Walmart, the largest retailer in the world, and Target, another retail titan, with both companies suffering their worst days of trading in decades after raising concerns about the ways rising costs were eating into their businesses.
Another influx of retail earnings will roll in this week, including from Costco, Best Buy, Nordstrom, and Dollar General. Meanwhile, the World Economic Forum holds its annual gathering in Davos, Switzerland, in the midst of a looming global slowdown.
Bear markets happen on a relatively regular cycle, and there have been 14 since 1945, lasting an average of 9.5 months. That is significantly shorter than bull markets, which last 2.7 years on average. If bear markets coincide with a recession, history has shown, they deepen and lengthen. If not, the outcome brightens, with losses easing and gains returning sooner.
In some sense, the market is overdue for a pullback. The last bear market was in March 2020, when the pandemic began, and lasted only 33 days. And there has not been a sustained bear market since 2009, at the end of the global financial crisis.
Of the many threats to the growth that stocks have enjoyed since the downturn two years ago, inflation is casting the coldest shadow. The Fed has not ruled out moving more aggressively if inflation does not cool considerably, and investors are worried about how that could weigh on growth.
Gas prices remained at record highs Monday, according to data tracked by AAA, with the national average hitting $4.59 a gallon. Just last week, for the first time, the average price topped $4 in every state in the country.
For those worried about how much volatility may still be in store, history has some comfort, according to Chris Larkin, managing director of investment strategy at E-Trade. In most bear markets since 1957, the market was already closer in timing to its eventual low than its high before the downturn, Larkin noted in commentary Monday.
“In other words, when a bear market “started,” there may have been more downside to come, but more often than not, the worst was already in the rearview mirror,” he said.