How long can the bear market rally last?
While I correctly predicted that the market would rally in the last blog, I did advocate selling rallies. The outlook is more optimistic now, but it will be a bumpy ride.
It has been a while since I last blogged.
In my last post on 19 April 2025, I said that the market would rally as I felt that we were at an oversold level in the stock market.
The S&P 500 bounced from its lows in April, and the Index rallied nearly 21%.
My last article also cited a few bear market studies, which indicated that we were reaching peak bullishness.
Back then in April, I was bearish on the after-effects of Liberation Day, and advocated selling the market on strength.
On Liberation Day on 2 April, President Trump announced widespread tariffs of 10% or more on their trading partners.
However, later in the month, the President flip flopped and extended the deadlines on the implementation of tariffs, while negotiating down the initial tariff rates with some countries.
This led to an improvement in sentiment and a subsequent steeper-than-expected V-shaped recovery in the stock market.
How the world has reacted
Fundamentally, high tariffs pose downside risks to economic growth.
Yet the timing and magnitude of these impacts are difficult to predict. We don’t know how inflation will be affected or how the supply chain will be altered.
According to Charles Schwab, it takes an average of 18 months to sign a trade deal and 45 months to implement.
Other nations are responding to US tariffs by changing their global trade frameworks, and seeking deeper trade ties with partners outside of the US. This is particularly significant given that 87% of global trade involves countries beyond the United States.
For example, key global trading partners like Canada and the European Union have expressed interest in diversifying trade and pursuing closer economic collaborations.
Support for initiatives that could enhance international integration without US involvement is increasing.
The EU is working to expedite and finalize a number of significant trade agreements, including those with Mexico and the UK.
A new digital trade pact has also been signed between the EU and Singapore. Further, negotiations are underway or planned with the UAE, Australia, India, and Indonesia as part of the EU's strategy to broaden its global trade footprint.
Implication of tariffs - is this the end of US exceptionalism?
Over the past 15 years, the US dollar has remained robust when measured on a real trade-weighted basis. Since the Global Financial Crisis, dollar-denominated assets have gained favor, fueled by the US economy outperforming most other major markets.
Foreign investors have made substantial allocations to US assets—often without currency hedging—and have generally reaped benefits from both asset performance and USD appreciation. This strength has also offered a cushion during periods of financial volatility.
However, rising uncertainty surrounding the US economy and unfavorable policies have prompted a shift, with more investors turning to hedging strategies, which could exert downward pressure on the dollar.
If the US Dollar Index breaks below 95 (referring to the chart above), I think we could see more downside and a sell-off in the Greenback. Otherwise, if economic data in the US stays resilient, the Dollar is likely to bounce off the long-term trend at the current level and head higher (see black line bouncing off in the chart above).
Economic fundamentals in the US are weak, but sentiment outside of the United States is improving
US GDP slumped in the first quarter, as companies front-loaded their inventory, creating a surge in imports and negative growth.
In May, forecasters from the survey conducted by the Federal Reserve Bank of Philadelphia lowered their outlook for real GDP, and raised their unemployment rate estimate.
Variables used to determine recession by the NBER showed a weakening trend as they turned from green in April to amber in May.
Sentiment tracked by global manufacturing PMI rove above 50 in June, led by higher optimism in China and Europe.
In addition, economic data in Europe and China still surprised to the upside, unlike the US.
On the valuation front, Europe looks to have more upside compared to the US, as per their lower PEG ratios.
International stocks have underperformed the US since 2010, but we are seeing a gradual narrowing of underperformance over the past few years. If the trend continues, US assets may be less attractive to own in the long run.
How long can the bear market rally last?
A study by Goldman Sachs Research showed that the average bear market takes about 20 months to recover. Structural bear markets on the other hand, take a longer time to recover.
Examples of structural bear markets would be the 1929 stock market crash, the downturn in Japan in 1990 and the Global Financial Crisis. Event driven bear markets, triggered by certain events, have shorter recoveries. For instance, the pandemic-induced sell-off in 2020 occurred for only a few months.
The CFA Institute also studied recessions as well as bear markets and published the types of styles that performed well.
Overall, cyclical styles such as value and small size tend to lead in the first year of a new mini bull market amid a long-term bear market. Value and small continue to lead, though at a more modest pace, in the second through fifth years of the new cycle. In bear markets, dividend yield, low volatility and value also generate positive alpha. No surprise but growth stocks underperform in bear markets.
My current thoughts
With all that said, I think it’s better to still stay long in stocks. Although the economy looks bad, the market and sentiment indicators are pricing in more good news ahead.
New blog format
Going forward, I would like to change the blog format to one with more frequent market updates, and more actionable insights, so as to provide more value for readers. So please stay tuned.
Disclaimer
Seven Fat Cows is a publication for information purposes only. I am not a financial adviser. You should seek independent legal, financial, or other advice to check if the information from this website relates to your unique circumstances.