How To Identify A Bear Market Rally

Bloomberg Opinion, Bear Market, Danielle DiMartino Booth, Quill Intelligence

History is replete with examples of major stock market recoveries following big sell-offs, many of which turn out to be head fakes.
 

The remarkable rebound in the U.S. stock market from the lows in late December has resulted in gains that the analysts at Goldman Sachs rightly point out already constitute banner returns for an entire calendar year. History is replete with examples of major recoveries following big sell-offs, many of which turn out to be head fakes otherwise known as bear market rallies. At the end of the trading day, it’s still fundamentals that should drive investing decisions.

If the economy is, in fact, slowing and that is what has sidelined the Federal Reserve, then what we are witnessing at the moment is a bear market rally. AdMacro Ltd head of research Patrick Perret-Green recently warned the firm’s clients that though the January employment jobs report might have looked good on paper with 304,000 jobs created, it nevertheless flashed a bright recession signal as the unemployment rate ticked up to 4 percent, the highest since June.

According to historic payroll data and the National Bureau of Economic Research, every time the three-month average unemployment rate exceeded its six-month average at cycle peaks over the past 50 years — like it did in January — the U.S. economy has experienced a recession. In a 2016 speech to the International Monetary Fund, then Federal Reserve Bank of New York President — and current Bloomberg Opinion contributor — William Dudley corroborated the historic pattern citing research first conducted earlier in his career at Goldman Sachs:

“History shows it is very difficult to push the unemployment rate back up just a little bit in order to contain inflation pressures. Looking at the post-war period, whenever the unemployment rate has increased by more than 0.3 to 0.4 percentage points, the economy has always ended up in a full-blown recession with the unemployment rate rising by at least 1.9 percentage points. This is an outcome to avoid, especially given that in an economic downturn the last to be hired are often the first to be fired.”

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