Bear market drivers ‘are starting to recede,’ analyst says

The first half of 2022 saw a lot of red for equities. The S&P 500 (^GSPC) recorded its worst performance since 1970 and officially slid into bear market territory in June 2022.

But Evercore ISI’s Rich Ross sees green in the market for the remainder of the year.

“For the first time in quite some time, those top-down forces, which have been the drivers, the headwinds for equities – the driver of the bear market – are starting to recede, and clearly stocks are feeding off of that coming off a powerful July,” Ross told Yahoo Finance Live.

Ross cited surges in yields, crude oil, and inflation as key bear market drivers. Since July 2020, the 10-year treasury yield (^TNX) went from 55 basis points to peaking at 3.43% in June 2022. Crude oil (CL=F) prices reached north of $120 per barrel this year, its highest level since March 2012.

In the past month, these indicators have contracted. U.S. crude oil dropped below $90 a barrel on Thursday, and the 30-year fixed-rate mortgage (FRM) dipped below 5%. In July 2022, the S&P 500 (^GSPC) rose 9.2%, marking the best month for the index since November 2020.

Ross also noted a correlation between lower oil prices and higher stock prices.

“In the current context, lower yields are good for the consumer and the stock market, largely driven by tech growth and consumer stocks on an index level,” Ross said.

However, Ross warned that an economic downturn – which Evercore ISI does not project – could be a bad sign for equities. “There might be some point in the future when you get diminishing marginal returns from weakness in crude,” Ross explained.

Ross has his eye on consumer discretionaries, semiconductors, and software.

“There’s no sector [like consumer discretionaries] that’s perhaps better positioned to benefit from some of the weakness we see from that top-down macro across crude, inflation, and interest rates,” Ross noted.

Consumer discretionaries have climbed from their trough a couple of months ago. The Consumer Discretionary Select Sector SPDR Fund (XLY) is up 16% from July 2022.

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Ross used the 1970s bear market to illustrate why investors should be looking to buy.

“Let’s compare and contrast to the ‘70s, a decade which many people have compared this to by virtue of inflation, crude oil, geopolitics, civil unrest as it were. In the ‘70s, that first bear market brought you down about 30%, and within a year, you had recouped 90% of those losses,” Ross explained.

Ross views $4,600 for the S&P 500 (^GSPC) and $15,000 for the Nasdaq 100 (^NDX) as reasonable price targets for the coming months.

“I’m telling you that we are probably in a cyclical bull market now that the bear market that commenced back in January, February on an index level is over. The lows are in, and we should now be buying dips, rather than selling rips, as has been the case for the last six months,” Ross said.

Yaseen Shah is a writer at Yahoo Finance. Follow him on Twitter @yaseennshah22

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