The Dow ‘exits’ bear-market territory. Here is why traders ought to take it with a grain of salt

The Dow
DJIA,
+2.18%
completed Wednesday’s session at its highest closing degree since April 21, in line with Dow Jones Market Knowledge. Because of the good points spurred by Fed Chairman Jerome Powell’s feedback on the Brookings Establishment, the blue-chip acquire has now risen 20.4% from its Sept. 30 closing low, which means it has technically exited bear-market territory. It’s the one main fairness index to take action.

Usually, when a given index or asset has risen 20% or extra off a current bear-market low, it’s stated to have technically exited bear-market territory.

All through the historical past of economic markets, there have been many examples the place shares have rallied throughout a bear market, solely to finally flip decrease and erase all of these good points.

Throughout drawn-out recessionary bear markets, shares typically rip larger, solely to see their good points fizzle many times. This has already occurred greater than thrice because the begin of 2022, together with notable counter-rallies that occurred in March, in July and August, and once more since mid-October, in line with FactSet knowledge.

Trying additional again, market historical past over the past couple of many years is replete with related examples, as MarketWatch has reported.

Following the bursting of the dot-com bubble, the Nasdaq Composite endured at the least seven rallies of 20% or extra earlier than reaching its final cycle low in 2002.

Market strategists are particularly cautious contemplating that the Fed nonetheless elevating rates of interest, though Fed Chairman Jerome Powell advised on Wednesday that senior Fed officers will probably go for a smaller hike in December after 4 consecutive 75 foundation level hikes — remarks that helped gas a broad stock-market surge.

This in the end underscores a easy level: it’s tough to say when a bear market has really ended, because the begin of a brand new bull market is commonly solely crystal-clear looking back — not in contrast to the problem of figuring out the beginning of a recession.

An analogous principle holds true for the economic system. Whereas consecutive quarters of contracting gross home product are sometimes described as a “technical” recession, this isn’t the factors utilized by the Nationwide Bureau of Financial Analysis when figuring out whether or not the U.S. economic system is definitely in recession or not.

Because the Dow charged larger late final week, one UBS markets strategist warned that traders ought to anticipate extra volatility.

“We stay skeptical that the current rally marks the beginning of a brand new market regime. The precedence of the Fed is more likely to stay the combat towards inflation, pending a extra constant stream of softer costs and employment knowledge. In opposition to this backdrop, we favor including to defensive belongings in each fairness and fixed-income markets,” stated Mark Haefele, chief funding officer at UBS World Wealth Administration.

The blue-chip gauged completed Wednesday’s session at 34,589.77, having risen 737.24 factors, or 2.2%. The S&P 500
SPX,
+3.09%
and Nasdaq
COMP,
+4.41%
additionally recorded robust good points of three.1% and 4.4%. It was the most effective session for all three indexes in roughly three weeks.