When Will The Bear Market End For Stocks?

2022 has been a brutal year for investors. Most broad asset classes have performed poorly, which is unusual. However, the rapid pace at which the Fed has increased interest rates is also uncommon.

There’s no magic bullet for telling when a bear market might end, but here are some clues for monitoring a bear market, and some suggestions for how to think about your investment strategy today.

There are different views for when the end to a bear market may emerge, but the prospect of improving newsflow, the Fed contemplating rate cuts, valuations and levels of volatility call all offer some pointers for when we may be able to put the bear market behind us.

The Prospect Of Improving Newsflow

Bear markets tend to bottom when the markets can see better news ahead, even if the current news is bleak. This occurs when markets can look forward on a 6-12 month view with some optimism that the economic news may improve. Of course, this can be when the current economic news is dire.

Currently, the picture on this is mixed. The economic news has not been as bad as feared in the U.S. so far given how well the jobs market has held up. The actions of the Fed and the state of inflation, especially with the reduce OPEC-induced spike in oil prices are a concern. Indeed, many indicators point to a recession.

However, as far as we know, a U.S. recession may not be here yet, and the jobs market in the U.S. remains remarkably robust. As such, the markets may need to see a recession before the bear market ends. We could be close to that point, with many forecasters suggesting a recession in 2023 or sooner is on the cards and a broad expectation of below-trend growth, regardless of whether it meets the definition of a recession.

When The Fed Cuts Rates

Another potential route to ending a bear market is for the U.S. Federal Reserve (Fed) to cut rates. Of course, the broader economic picture matters too, but just as the Fed raising rates has hindered the economy and stock valuations so the Fed cutting rates is expected to have a positive effect on the markets.

Unfortunately, the Fed has no plans to cut rates currently. In fact, more hikes are expected at the Fed’s November and December meetings. However, the markets do see some chance of a rate cut in 2023. This is far from certain, because the markets suspect the Fed will at least hold rates steady, or even nudge them up further for much of 2023.

However, by the end of 2023, the markets see about a 1 in 3 chance the Fed has cut rates. That’s a double-edged sword as the Fed may be cutting based on economic worries, but it may be around the point that the bear market starts to end, if history is a reasonable guide.

When The VIX Falls Back Below 20

Bear markets are often accompanied by elevated market volatility. As we’ve seen in 2022 there have been a large number of days when the markets have moved up or down by 1%. Certainly more than in an average year. One measure of this volatility is the VIX index, measuring implied volatility from the options markets. It’s currently trading at over 30, suggesting that volatility is expected to remain high. If the VIX falls below 20 for a sustained period, that could be a sign the bear market is ending. However, others are looking for a bigger spike in the VIX before the bear market concludes.

When Stock Valuations Become More Supportive

The most worrying argument for the ending of the bear market is the need for more supportive stock valuations in the U.S.. That’s because U.S. stocks in 2021 hit very high valuation levels compared to history. Stocks hit a PE ratio of over 35x, which means stocks traded for 35x their current earnings. That’s abnormally high.

Now the PE ratio for the U.S. market is closer to 18x. Clearly that’s a lot lower. However, the average PE for the markets over decades is 15x and it has been as low as 5x, so though stocks have fallen in value, it’s hard to say that they are cheap in valuation terms in the U.S. today.

Interestingly, international markets currently look better on this metric. U.S. markets still appear fairly expensive in absolute terms, but many markets in Europe, Asia and elsewhere are at trading at lower valuation levels.

Despite all of the above, timing the markets is incredibly challenging. So below are some strategies that may help you in a bear market.

Think Long-Term

Perhaps the most important thing is to have a long-term perspective as an investor. Yes, 2022 has been a bad year, but bear markets have happened before and will happen again. The historic returns for stocks, which tend to look better than most other asset classes, include lots of bad years, times of fear and bear markets. The markets have seen nuclear explosions, Presidential assassinations, world wars and many crises previously and come through it, so this time may not be too different.

So if you’re a long-term investor, the presence of a bear market is an expected bump along the way to what will hopefully be robust longer term returns if history is any guide. Nonetheless, it can be hard to take the long-term view when you’re seeing daily losses.

Dollar-Cost Averaging

Dollar-cost averaging can also be a useful strategy. It’s very hard to time the market, but steadily investing each month can help you avoid waiting in cash or needing to make market timing calls. Cash has historically has lost out to other assets.

Diversify

The final consideration is to diversify your investments. Yes, most assets have moved down in 2022, but bonds generally have held up better than stock in 2022 so far, even as both asset classes have lost money.

Also, in 2022 so far, technology stocks have performed worse, while energy stocks have largely had a good year as prices have risen. Making sure you have exposed to different sectors of the market, perhaps through a low cost index-tracking ETF can help smooth out market fluctuations too.

Finally, there are some signs that international markets are less expensive than the U.S. today, so spreading your investments across different regions of the world may be useful too.

It’s possible that the worst of the current bear market is behind us. The average S&P 500 bear market lasts under a year based on history. It’s important to stick to your long-term investing strategy and consider techniques like diversification and dollar-cost averaging, rather than get too caught up in the daily swings of the market and negative headlines. In fact, if headlines do become really negative, it could even be a sign that the bear market is coming to an end.