The Great Normalization

By Charles Boccadoro

Numerous bear sightings occurred these past several weeks, but with June’s awful performance, the new bear is clear and present. Intra-month, the S&P 500 closed down more than 20% from its previous peak and at month’s end, it closed down level at 20%, similar to the CV-19 bear of March 2020. In June alone it dropped more than 8%. This retraction marks the seventh bear market since 1968 (or tenth since 1926), as depicted in the chart below.

It remains quite astounding what a 3% rise in the 10-year T-Note has done to equity and bond markets over the past 6 months. Some good news? 10-year CDs are now yielding close to 4%.

The previous cycle, CV-19, lasted 2 years, delivered 52% return and the strongest annualized return of the past nine cycles at 23.4%/yr, recovering rapidly from March’s rapid decent, when it felt like an asteroid was upon us. It included six months under-water followed by a period of numerous (13) all time highs, which can likely be attributed to aggressive fiscal (Congress) and monetary (Fed) policies implemented to help society deal with the global pandemic.

The latest cycle, which we will nickname “The Great Normalization,” began in January 2022. It marks a period of rising rates to get back to historical norms and comes at a time of high inflation, likely caused by 1) supply chain shortages as society emerges from CV-19 and Russia’s invasion of Ukraine, and 2) the stimulus and years of zero interest rate policy. Likely too, ends a period of excessive valuations, particularly in so-called meme stocks and growth stocks that have yet to turn a profit.

The table below summarizes full cycle performance since 1926:

The table below provides a breakout of the bear and bull market components of the same cycles. The CV-19 bull nearly doubled investor returns in just 21 months. While short lived, it provided the highest annualized returns of any previous cycle.

For reference, our series on market cycles for US equities, which includes methodology, is summarized here:

Refinitiv will drop month-ending June data tomorrow morning, Saturday, 2 July. Please look for updated MFO Ratings on the MFO Premium site by early evening (Vancouver BC Time).

Finally, please join us on Tuesday, 12 July for an MFO Premium Mid-Year Review webinar. Per our custom, please register for either the morning or afternoon session.

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