It’s a unique moment for the US stock market, which looks down on a range of different circumstances, from geopolitical risks to rising interest rates, which have historically led to bear markets.

Bloomberg: The S&P 500 and Nasdaq 100 indices are coming off their best weeks since November 2020, even after a rocky start to the year. But the question for investors now is whether earnings will last. It’s a unique moment for the US stock market, which is looking down on a range of different conditions – from geopolitical risks to rising interest rates – that have led to bear markets in the past.

First, the Federal Reserve is starting to raise interest rates, with its first quarterly hike last Wednesday, and many more on the way. Then there is Russia’s war with Ukraine, which is creating a humanitarian crisis in Europe and destabilizing financial markets around the world. Meanwhile, oil prices are soaring above $100 a barrel and are threatening to fuel inflation further, which is already at a 40-year high. And parts of government bond yield curves are inverting.

Here’s a look at what history says about the US stock market when these factors collide:

History of bear markets

The S&P 500’s bull market turns two Wednesday after the index had a stunning rebound from the Covid-induced economic downturn after bottoming out on March 23, 2020, wiping out about 34% of its value. Since then, the index has doubled in the face of the worst global pandemic in a century. Since World War II, however, the combination of a Fed rate-cutting cycle, geopolitical tensions, high inflation and a flattening yield curve has led to a bear market, or a 20% drop from the index’s peak, according to investment research firm CFRA.

Unique cross currents

It is rare for the Fed to raise interest rates at a time when markets are under pressure and geopolitical tensions are bubbling up. The last two times the S&P 500 went into a correction or bear market while the Fed was in a tightening cycle occurred during the Hungarian uprising and the Suez Canal crisis of 1956 and the Tet Offensive in 1968, a pivotal moment in the Vietnam War. with the north launching a coordinated attack on the south, inflicting heavy casualties.

Sector Directions

How certain industries are performing in the short term could provide investors with more clues about the trajectory of the market. Late cyclical sectors such as materials and industrials and services along with defensive groups such as consumer staples and healthcare tend to be strong six months before a recession. But price-sensitive stocks such as financials and real estate, as well as growth-oriented companies in the technology, consumer discretionary and communications services sectors, have lagged historically. For the S&P 500 to sink into a bear market, Ned David Research will likely require cyclical and defensive sectors to fall much further than current levels.

Moderate returns

Certainly, most economists don’t expect the US economy to plunge into recession in 2022 as a result of a strong labor market, robust consumer spending and better-than-expected corporate earnings. Another part of the yield curve inverted on Friday, with three-year government bond yields surpassing five-year government bond yields for the first time since March 2020. , has also been reduced. But the ten-year yield compared to three-month Treasuries, which has similarly forecast a downturn, is actually getting steeper.

Still, analysts expect the market to yield more moderate returns from here on out as the Fed withdraws monetary policy support from the financial system. However, stocks may still have room to run. According to Truist Advisory Services, the average bull market in the S&P 500 has lasted 5.8 years since 1957. The current bull market is only two years old.

This post From geopolitical risks to rising interest rates, US equities face unique risks that lead to bear markets

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