Light at the end of the tunnel for the S&P 500 bear market?

[view original post]

The US has been in a bearish trend for 160 days, over half the median length of an average downturn, meaning there could be a light at the end of the tunnel for shareholders. 

A bear market is defined broadly as a 20% or more decline in the market share value of market indicators such as the Dow Jones S&P 500 indices, as opposed to a ‘bullish’ or high-performing stock market where the value of those stocks increases.  

The S&P 500 index has fallen 20.69% in the past six months, officially entering a bear market after surpassing the threshold this month.  

The ongoing decline has already lasted for longer than the flash-in-the-pan bear market that immediately followed the Covid-19 pandemic.  

That was one of the shortest bear markets in history, lasting for just 98 days, compared with the longest bear which was the Great Depression that followed the Wall Street crash in 1929.  

The prolonged bear market of the Great Depression lasted for 4,498 days, according to asset manager SEI Investment Management Corp and Yardeni Research, which have analysed the historical performance of the S&P 500.  

According to the asset manager, the average length of a bear market is 1,102 days and the midpoint is 663 days. 

With both federal and European authorities expected to raise base rates of interest this week as part of ongoing fiscal tightening measures designed to combat high inflation, the market could see further declines.   

European markets are already beginning to look bearish, according to Swissquote’s Ipek Ozkardeskaya, despite the FTSE 100 in London being ahead of a year ago.

The Stoxx Europe 600 index, Europe’s equivalent of the S&P 500, has dropped by 12.6% in the past six months so hasn’t officially stepped into a bear market yet.

With further fiscal tightening on the agenda, the decline would need to almost double to enter bear territory. 

International markets are currently battling record levels of inflation, with the Consumer Prices Index hitting 9% in the year through to April 2022 in the UK and 8.6% at year-end in May in the US, compounded by fears of rising interest rates and low growth that portend an imminent recession.  

However, there might just be a pot of gold at the end of the rainbow for shareholders following these rainy days. 

Stocks that are priced cheaply in the short term due to current market factors, but are able to recover strongly, could be exceptionally profitable for shareholders.  

Bear markets usually involve an average decline of 33.5%, but the upside at the other end could be as much as 77.5%, according to SEI. 

Some investors have chosen to hedge against the recent bearish trend by investing in so-called ‘bear funds’, mutual funds that benefit from a downturn.  

For example, Tuttle Capital Management set up a fund to short investments in Cathie Wood’s ARK Innovation Fund after the latter’s investments performed badly. The exchange-traded ARKK fund has generated 53.% losses in the year to date, as of 31 May.  

Other bear funds are tied inversely to market indices so that, for example, if the S&P 500 is performing badly in a bear market, investors would conversely get an upside.  

Examples of these index-tied bear funds include the Rydex Inverse S&P 500 Fund, which has risen 21% in the past six months in almost exact inverse correlation to the S&P 500. 

Now that the US market is likely to be concluding the latter part of its bearish trend, according to data quoted by SEI, it might be a good time to revise investments in such ‘bear’ funds, though further monetary tightening in Europe could just wake up the bear from hibernation.