The Dow ‘exits’ bear-market territory. Here’s why investors should take it with a grain of salt

The Dow
DJIA,
+2.18%
finished Wednesday’s session at its highest closing level since April 21, according to Dow Jones Market Data. Thanks to the gains spurred by Fed Chairman Jerome Powell’s comments at the Brookings Institution, the blue-chip gain has now risen 20.4% from its Sept. 30 closing low, meaning it has technically exited bear-market territory. It’s the only major equity index to do so.

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.

Throughout the history of financial markets, there have been many examples where stocks have rallied during a bear market, only to eventually turn lower and erase all of those gains.

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 2022, including notable counter-rallies that occurred in March, in July and August, and again since mid-October, according to FactSet data.

Looking further back, market history over the last couple of decades is replete with similar examples, as MarketWatch has reported.

Following the bursting of the dot-com bubble, the Nasdaq Composite endured at least seven rallies of 20% or more before reaching its ultimate cycle low in 2002.

Market strategists are especially cautious considering that the Fed still raising interest rates, although Fed Chairman Jerome Powell suggested on Wednesday that senior Fed officials will likely opt for a smaller hike in December after four consecutive 75 basis point hikes — remarks that helped fuel a broad stock-market surge.

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 charged higher late last week, 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 Wednesday’s session at 34,589.77, having risen 737.24 points, or 2.2%. The S&P 500
SPX,
+3.09%
and Nasdaq
COMP,
+4.41%
also recorded strong gains of 3.1% and 4.4%. It was the best session for all three indexes in roughly three weeks.