The Dow Jones Industrial Average finished Friday’s session at its highest closing level since late April, according to Dow Jones Market Data, and is on the cusp of exiting “bear market” territory — at least, based on one technical indicator. But that doesn’t mean that equity investors can breath easier. In fact, it could mean just the opposite.
As of Friday afternoon, the blue-chip gauge
has risen more than 19.5% from its 52-week low of 28,725.51, which it reached on Sept. 30. Typically, when a given index or asset has risen 20% or more off a recent bear-market low, it is said to have technically exited bear-market territory.
But before investors get too excited, just because stocks have rallied sharply doesn’t mean that they will continue to climb.
Throughout the history of financial markets, there have been many examples during bear-markets where stocks rallied sharply over a brief period, only to eventually erase all their gains and make new bear-market lows.
One of the most recent examples of this dynamic playing out is when stocks tumbled to fresh lows in September and fresh intraday lows in October after Federal Reserve Chairman Jerome Powell insisted that the Fed would give stocks no quarter as it focused on battling inflation.
Recent history is replete with similar examples, most notably in the wake of the dot-com crash, as MarketWatch has reported.
After the bubble burst in early 2,000, the Nasdaq Composite endured at least seven rallies of 20% or more before reaching its ultimate cycle low in 2002. At that point, it had fallen nearly 80% from its peak more than two years earlier.
This is why many market analysts caution against betting that sharp gains for stocks will continue, especially when the Fed is still raising interest rates and other U.S. stock indexes remain in a bear markets.
During drawn-out recessionary bear markets, stocks often rip higher, only to see their gains fizzle again and again. This has already happened more than three times since the start of the year, including notable counter-rallies that occurred in March, in July and August, and again since mid-October, according to FactSet data.
This ultimately underscores a simple point: it’s difficult to say when a bear market has truly ended, since the start of a new bull market is often only crystal-clear in retrospect — not unlike the challenge of determining the start of a recession.
A similar precept holds true for the economy. While consecutive quarters of contracting gross domestic product are often described as a “technical” recession, this is not the criteria used by the National Bureau of Economic Research when determining whether the U.S. economy is actually in recession or not.
As the Dow made new highs on Friday, one UBS markets strategist warned that investors should anticipate more volatility.
“We remain skeptical that the recent rally marks the start of a new market regime. The priority of the Fed is likely to remain the fight against inflation, pending a more consistent stream of softer prices and employment data. Against this backdrop, we favor adding to defensive assets in both equity and fixed income markets,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
The blue-chip gauged finished Friday’s session at 34,347.03, its highest closing level since April 21, having risen 152.97 points, or 0.5%. The S&P 500
by comparison, finished the day in the red.
In another notable development, all 30 Dow components finished Friday’s session above their 50-day moving averages for the first time since June 2, 2020, according to Dow Jones Market Data.
The Dow will technically enter a new bull market on this basis if it closes above 34,470.61.