The bear market gained substantial traction this week as the S&P 500 finally fell more than 20% from its highs and stocks suffered two ugly gap-downs. The Fed accelerated the selling with the biggest interest rate increase since 1994 and made it clear that a recession may be necessary to get control of inflation. Hope arrived that an aggressively hawkish Fed would help the market to rally, but the economic uncertainty was just too great, and the bulls ended up trapped.
Stocks did manage a little rebound on Friday, but it faded late in the day and was quite weak. Broad weakness in oil and energy held back the indexes, but the buying in other groups was not very impressive, either. The Nasdaq managed to outperform, primarily because it has few energy holdings.
Breadth was better than two to one positive, but 1,250 stocks hit new 12-month lows on Friday. New lows piled up all week and hit the same levels that we saw back on May 20. One of the most notable characteristics of the recent weakness is that it is extremely broad. Over 90% of the stocks in the S&P 500 were down on two different days this week. This is largely a function of shorting indexes and exchange-traded funds, but illustrates how stock picking is a futile pursuit at present.
The good news is that the bear market did make progress. There isn't anyone still pretending that this is not a full-blooded bear at this point. The selling is extreme, the mood is grim, and optimism is nearly nonexistent. That is good news on a contrary basis, but this is not a market that is going to deliver a "V"-shaped recovery. Unlike the other recent bear markets, this one is being driven in large part by a hawkish Fed, and that is a headwind that can not easily be overcome.
Have a great long weekend, and I will see you on Tuesday.
