S&P 500 pokes the bear

Coming off another volatile week of trading amid disappointing retail earnings and pervasive inflation chatter, the US stock market finds itself on the fringes of a bear market as it gets ready for a busy week of Fed-centric data.

After hitting a seven-day high last Tuesday, on Wednesday the S&P 500 (SPX) erased more than three days of upside with its biggest down day (-4%) since June 2020. And on Friday, it fell 20% below its January record high before a remarkable surge in the final hour of trading pushed the index back above the bear-market threshold and back to breakeven for the day:

The headline: Market tests bear territory.

The fine print: Last week the SPX fell to new intraday and closing lows within the current correction, but the Cboe Volatility Index (VIX), which typically rallies as the market falls, has remained below its levels from March.

The number: +0.9%, the larger-than-expected increase in April’s retail sales. Also, March’s tepid 0.5% increase was revised sharply higher to 1.4%. But last week’s retail earnings mostly disappointed, with big misses (and sell-offs) from Walmart (WMT), Target (TGT), and Ross Stores (ROST).

The scorecard: The small-cap Russell 2000 (RUT) held up best to last week’s selling pressure:

Sector roundup: The strongest S&P 500 sectors last week were energy (+0.8%), health care (+0.6%), and utilities (+0.2%). The weakest sectors were consumer staples (-8.8%), consumer discretionary (-7.8%), and information technology (-4.3%).

Highlight reel: Griffon (GFF) +24% to $30.13 on Monday, Upstart (UPST) +23% to $46.66 on Tuesday. On the downside, Forge Global (FRGE) -38% to $17.49 on Monday, Target (TGT) -25% to $161.61 on Wednesday.

Futures action: July WTI crude oil (CLN2) closed an up-and-down week near its two-month highs at $110.64/barrel. After falling to a 15-week low of $1,785/ounce last Monday, June gold (GCM2) rebounded to end the week at $1,843.50. Biggest up moves: June Russian ruble (R6M2) +8.2%, July hogs (HEN2) +7.7%. Biggest down moves: July lumber (LBSN2) -13.6%, June E-Mini Nasdaq 100 (NQM2) -4.9%.

In addition to the latest FOMC meeting minutes, traders have the Fed’s go-to inflation barometer, the PCE Price Index, to look forward to:

●Today: Chicago Fed National Activity Index
●Tuesday: S&P Global Manufacturing and Services PMIs (flash), New Home Sales
●Wednesday: Durable Goods Orders, FOMC minutes
●Thursday: GDP (Q1, 2nd estimate), Pending Home Sales
●Friday: Personal Income and Spending, PCE Price Index, Advance Trade in Goods, Michigan Consumer Sentiment (final)

Retail stocks dominate the earnings calendar for a second week:

●Today: Advance Auto Parts (AAP), Heico (HEI), Nordson (NDSN)
●Tuesday: Canadian Solar (CSIQ), Best Buy (BBY), Ralph Lauren (RL), Toll Brothers (TOL), Agilent Technologies (A), Nordstrom (JWN), Intuit (INTU), Urban Outfitters (URBN)
●Wednesday: Dick's Sporting Goods (DKS), Box (BOX), NVIDIA (NVDA)
●Thursday: Jack in the Box (JACK), Ulta Beauty (ULTA), Macy's (M), Dollar Tree (DLTR), Medtronic (MDT), Dollar General (DG), Buckle (BKE), American Eagle Outfitters (AEO), Burlington Stores (BURL), Workday (WDAY), Zscaler (ZS), Gap (GPS)
●Friday: Big Lots (BIG), Canopy Growth (CGC)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

If and when the SPX actually closes 20% below its January 3 record close of 4,796.56 (check out “Lessons from corrections and bear markets”), there will likely be no shortage of gloomy headlines. But at this juncture, officially falling into a bear market may contain some good news for bulls:¹

1. In seven of the eight bear markets since 1957, by the time the SPX fell into bear territory, the market was already closer (in terms of time) to its eventual low than it was to its pre-bear high.
2. Similarly, when the SPX fell into a bear market, the percentage decline itself was already past its halfway point five out of eight times—i.e., the SPX’s maximum bear-market loss exceeded 40% only three times (1973–‘74, 2000–‘02, and 2008–’09).
3. The SPX’s average one-year gain after hitting a bear-market bottom was 43%—more than five times the SPX’s overall average one-year return.

In other words, when a bear market “started,” there may have been more downside to come (check out Morgan Stanley’s midyear investment outlook for a take on the current market), but more often than not, the worst was already in the rear-view mirror.

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¹ All figures based on S&P 500 (SPX) daily closing prices, 1956 – 2022. “Bear market” refers to an SPX closing price at least 20% below a prior close. Supporting document available upon request.
² MorganStanley.com. 2022 Midyear Investment Outlook: Defend and Diversify. 5/10/22.