Goodbye Mr Bear Market?

RIP Bear Market?

Last week was quite busy despite the summer season, judging by the following figures:

• July CPI was 8.5% down from 9.1% in June.
• This was followed by a sharp rise in rate-sensitive assets such as the Nasdaq (+2.50%).
• Some commentators wondered whether this was the end of the Bear Market.

The Nasdaq has indeed risen over 20% since its previous low, and some headlines have speculated that this could be the start of a new Bull Run.

However, if we look at the Nasdaq, and in particular the 2000-2002 period, we can see that a 20% rise is clearly not an indicator of the end of a Bear Market:

Inflation remains in focus

Looking more closely at the inflation figure, it would seem that it is too early to consider that inflation is behind us:

• The drop in oil was the main driver of the decline in the CPI.
• Core CPI (excluding food and energy) stood at 5.90%, the same level as in June.
• Wages remain high, and transport, housing and food costs continue to rise, putting upward pressure on salaries.

The other factor to consider is the base effect: we will compare 2022 inflation to the already high 2021 figures.

• We can therefore expect lower CPI figures in the future, but this does not mean that inflation is over.

What would be FED next move?

Tomorrow, we will have the minutes of the FOMC meeting.

In the meantime, let's just take a look at the FedWatch Tool to see what the market is pricing. How it works:

• The 30-day Fed Funds futures are monthly contracts traded in the market.
• Market participants can use them to hedge themselves or speculate.
• The available market data is then used to obtain the implied level of the FED rates

Market participants are then pricing a 50 bps hike for September:

However, rapid changes can occur in the FED futures market, hence the volatility of this indicator. It should rather be used to assess the market at a given time.

Conclusion

Despite several bullish headlines, a closer look at past and present data suggests caution.

It will be particularly difficult to accurately determine when the bear market bottoms, as there is no single inflection point.

The September FOMC meeting (21 September), August CPI (13 September) and non-farm payrolls (2 September) should be the next market catalysts.

In the meantime, I hope you enjoy this beautiful summer.