Is the market out of bear territory? It’s complicated.
- December 2, 2022
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The Dow Jones Industrial Average rose 5% in November, with a surge on the last day of the month pushing the index out of bear territory. So does this mean the grim year for stocks is over?
Not quite, experts say.
Even as the Dow recovered from its downturn on Wednesday, the tech-heavy Nasdaq index remains in bear territory, as does the broad-based S&P 500 index — a term that means stocks are down at least 20% from their last high are.
While bear markets have been fairly frequent, the recent slump has proved unsettling for many investors, who are also grappling with the highest inflation in 40 years – an economic trend that is also eating away at the value of their investments.
“The Dow’s exit from a bear market is an important step in the market recovery, but it’s only one step,” Barry Gilbert, asset allocation strategist at LPL Financial, said in an email to CBS MoneyWatch.
The Dow is a “quirky index” made up of 30 publicly traded stocks that have what’s called a value tilt, meaning they’re stocks trading at lower prices than their fundamentals suggest, Gilbert noted. That suggests there are “niches of the market that have been more resilient” than others, he wrote.
The Dow Jones was up 20% from its last low on Sept. 30 by Wednesday’s close. On Thursday, the Dow slipped 0.4%, taking the index just below the bear market recovery threshold.
Meanwhile, the Nasdaq remains firmly mired in its slump, with the index down 27% for the year. Tech titans like Meta, Google and Amazon have lost billions in value as investors have fled growth-oriented stocks, which are viewed as riskier assets than value stocks.
Rally in December?
Historically, December has proven to be a strong month for stocks, though year-end rallies have often fizzled, noted George Smith, portfolio strategist at LPL Financial, in a research note Thursday. Recent performance in the market could also provide a clue as to what to expect this month, Gilbert said.
“A solid October and November could mean a weaker December, but when we look back a year, market strength like the one we’ve seen over the past two months has often been a sign of solid market performance going forward,” Gilbert said.
The key, he added, is that markets are forward-looking as investors act on their belief in future corporate earnings trajectories. For example, Wall Street plunged into bear territory earlier this year on concerns that high inflation, rising interest rates and a weakening economy would hurt sales and profits. Stocks fell long before the impact was felt across the economy.
For now, investors are focused on whether the Fed can walk a tightrope between fighting inflation and pushing the economy into recession.
If the Fed can successfully manage this balancing act, “stocks are likely to respond positively throughout 2023, even if it means a mild recession,” Gilbert said. “But finding that balance isn’t easy, so recovery is unlikely to be a straight line.”