The Stock Market’s Rally Is Real. It’s Still a Bear Market.

Text measurement

Even bear markets get bounces.

The stock market had a terrific week, and for the primary time in a very long time, the rally appears like it might probably final. The

Dow Jones Industrial Average
rose 5.4%, the

S&P 500
gained 6.4%, and the

Nasdaq Composite
climbed 7.5%.

Give Federal Reserve Chairman Jerome Powell credit score. In testimony before Congress, he mentioned that engineering a delicate touchdown had change into “very difficult,” suggesting that getting inflation below management might result in a recession. Under regular circumstances, that might be a worrisome signal. But everybody was already talking about the possibility of a slowdown, so his acknowledgment of the chance served as a unusual supply of aid, if solely as a result of it would imply less-aggressive price will increase sooner or later.

Expectations for inflation within the University of Michigan client sentiment survey additionally dipped from the preliminary learn earlier this month. Now, the percentages of the federal-funds price hitting a vary of a minimum of 3.25% to three.5% in November fell to 50%, down from 71% a week in the past, and that’s a lot simpler for the market to deal with.

Powell’s testimony additionally got here on the proper time for the market. Investors had gotten extraordinarily pessimistic, and lots of had a staggering amount of money available after the current selloff—Bank of America famous its personal purchasers had 12.6% of their belongings in money, essentially the most since October 2020 and above the historic common of 12.4%. Others may not have any alternative however to purchase given the truth that the primary half of the 12 months ends on Thursday, forcing some portfolios to rebalance.

Normally, rebalancing will get a lot of consideration, but it surely solely actually issues when the market is unstable and liquidity is tight, because it has been this 12 months, in response to Marko Kolanovic, chief world markets strategist at J.P. Morgan. The S&P 500 rallied 7% over the past week of the primary quarter and about 7% the final week of May—and it might rally once more as we go into the final week in June, Kolanovic writes.

Even Stifel strategist Barry Bannister, who appropriately predicted this 12 months’s downswing, now says that the S&P 500 is probably going headed greater. It isn’t that he all of a sudden turned bullish—he nonetheless believes the U.S. entered a long-term bear market in 2022—however moderately that bear markets by no means merely transfer in a single course.

For now, he thinks that the expertise sector, notably semiconductors and {hardware}, together with

Apple

(ticker: AAPL), will lead the inventory market greater. “[It will be] a basic countertrend rally this summer time,” writes Bannister, who sees the S&P 500 hitting 4150, up 13% from the index’s June 16 low of 3666.77.

That’s probably the place the rally runs out of steam. Just as bull markets can endure draw back corrections, bear markets expertise corrections of their very own, and technical evaluation suggests the index ought to bounce to someplace between 4000 and 4100, in response to 22V Research’s John Roque. Just don’t rely on it going an excessive amount of greater. “[It’s] nonetheless a bear market,” he says.

Don’t neglect it.

Write to Ben Levisohn at Ben.Levisohn@barrons.com