From an Escalator to a Rollercoaster

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

Equities declined in April and May, but in an orderly fashion. That changed on June 8th. After a nice rally the last week of May and the first week of June, equity markets fell six of the next seven trading days. The S&P 500 Index fell 493.91 points, or -11.9%.  The Dow Jones Industrial Average fell 3,253.07 points, or -9.8%. The NASDAQ Composite Index fell 1,529.13 points, or -12.6%. It was a very rough period. And then, just like that, equity markets rallied. The next six days the S&P 500 Index rose +6.8%, the DJIA rose +5.5%, and the NASDAQ Composite Index rose +9.3%. Needless to say, market volatility increased sharply.

In spite of the recent rally, equity markets are still firmly in the grips of short-term, intermediate term, and long-term downtrends. That sharp mid-June decline took the S&P 500 through the -20% marker, which signals a Bear Market. An identically strong final week in June would still not be strong enough to break the short-term downtrend. So from a traditional perspective, a Bear Market is upon U.S. equity markets.

The missing ingredient, however, is an economic recession. Since 1950, Bear Markets have occurred in concert with an economic recession. There may be a fear of recession caused by the rises in interest rates and inflation. But every economist that is worth his salt knew that interest rates and inflation were going to go higher when the Federal Reserve reversed its quantitative easing policy. So there is only the ‘perception’ that the economy is surprised and may be negatively impacted. The ‘reality’ is that it had to happen eventually. Another reality is that equity markets are still oversold and ripe for a rally. Any kind of rally.

Bond markets are also deeply oversold. Since May,bond market moves have been synchronized with equity markets. While U.S. equities were rising +6%, declining -12%, then rising +6%, the Bloomberg U.S. Aggregate Bond Index was rising +2.6%, declining -4.8%, then rising +2.7%. As of last Friday’s close, the Bloomberg U.S. Aggregate Bond Index was down -10.9% YTD. The Bloomberg U.S. Municipal Bond Index was down -9.3%, and the Bloomberg U.S. Corporate High Yield Bond Index was down -12.6% YTD. The Bloomberg Global Aggregate Index was down -13.9% YTD. Bond markets are also ripe for a rally.

From an equity sector perspective, some stalwart sectors through May experienced very sharp declines during the June slide.  Most notable was energy, with the S&P Energy Sector Index falling as much as -24.0% in just ten days, but still up +31.2% YTD as of last Friday. The S&P Materials Sector Index fell -17.0% over the same time and is now down -14.3% YTD. None of the major S&P sectors escaped the mid-June sell-off. The S&P Energy Sector Index is the only major S&P index that is in positive territory YTD.

Now we are in a rare situation where both equity and bonds are in Bear Markets. Even more rare, the U.S. economy is not in a recession, at least not yet. Nor do we find the U.S. economy being artificially forced into a recession through government induced business closures like we experienced with COVID. The war between Russia and Ukraine most certainly doesn’t deserve credit for disrupting the U.S. economy, at least not yet. Inflation is at a 40-year high and is especially problematic for the upcoming mid-term elections. But once again, while inflation has been negatively impacting bond markets for almost a year now, it’s been no surprise to the stock market, at least not yet. Is it possible that these ‘not yets’ stacked on top of each other are formidable enough for the stock market to slam on the brakes of an economic recovery that is still evolving? Historically, these problems would be called ‘bricks in the wall of worry’ that the stock market loves to climb. I don’t see any reason for that age-old truism to fail us this time around.   

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

© 2022 Edward D. Foy.   [email protected], .

Sources:,,, Morningstar.