Is it still a “bear market rally?” After a big surge from the lows following the Russian invasion of Ukraine, Mike Wilson from Morgan Stanley thinks so. To wit:
“The first quarter was one of the worst on record for the collective performance of stocks and bonds, with the latter worse than the former. This makes sense given that investor concern focused more on the ‘Fire’ (inflation and the Fed) than the ‘Ice’ (growth slowdown). However, that leaves us more constructive on bonds than stocks over the near term as growth concerns take center stage – hence our doubling down on a defensive bias.
The rally was predictable from a technical perspective, but it was always a bear market rally in our view, and now we think the bear market rally is over.” – Morgan Stanley
There are certainly some technical reasons to suggest the bear market rally may be complete. As shown, the market swung from a deeply oversold to an overbought condition in a very short period. Such is usually indicative of bear market rallies.
Adding to Mike’s “bearish case” is that liquidity is reversing, and the Fed is set to drastically tighten monetary policy. The latter point, when combined with already high levels of inflation, is almost certain to cause a problem.
Looking back historically, high levels of inflation combined with Fed tightening of monetary policy led to either a recession, bear market, or a crisis.
During those periods, bear market rallies were quite common. As is always the case, the market does a good job of luring investors back in at exactly the wrong time.