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Cyclical Bear or Structural Bear?

Accelerating commodity prices, higher interest rates, geopolitical tensions, and increasing uncertainties surrounding the Fed rate hikes have already impacted financial markets, fixed income assets, currencies, global equities, including growth and value stocks. The above conditions may lead to an economic environment of both inflation and recession or stagflation. Under an inflationary scenario of higher interest rates, valuations and future earnings/growth rates will erode. Under a recessionary scenario, future earnings and growth rates must also be adjusted downward.

Federal Reserve FOMC meets this Tuesday and Wednesday to implement the first of several interest rate hikes to fight inflation. It is reasonable to expect increased volatility as investors scrutinize the Fed minutes and actions this week.

Although inflation persisted before the Russia/Ukraine crisis, the stock market and economically sensitive sectors have fallen for months as if investors are pricing in an economic slowdown or contraction. Consumer sentiments, consumer confidence, and investor sentiments have also declined for many months before the geopolitical turmoil.

Slowing consumer spending (70% of U.S. GDP), rising energy prices (i.e., WTI and Brent Crude Oil, etc.), economic sanctions on Russia, higher interest rates, and trade tensions with China increase the odds for the U.S. or global recession.

The pertinent question then becomes will another U.S. recession lead to a cyclical bear market or the next structural bear market?

A review of the past ten (10) U.S. recessions since the 1950s are listed below:

(1) The ten (10) U.S. recessions coincided with U.S. stock market bear markets. Stocks declines tend to lead to U.S. recessions as stocks are leading indicators of economic activities.

(2) Each of the ten U.S. recessions corresponded to either the shorter-version of the cyclical stock market bear decline within an existing structural bull stock market or the longer-version of a secular stock market bear market.

(3) Of the ten U.S. recessions, six have occurred during structural bull markets and four within structural bear markets.

(4) Despite the rise in U.S. interest rates, yields remain near historic lows. Stocks have benefited from sustainable low-interest rates. TINA (there is no alternative) may force investors, including asset allocators and pension funds, to continue to buy stocks to meet their long-term investment objectives. Unless global interest rates rise dramatically, money managers will not achieve long-term investment targets with bonds alone.

(5) As of 3/10/22, the Fed balance sheet stands at a historic high of 8.91 trillion dollars. It remains one of the best indicators of the Fed’s direct intervention in the economy via its ownership of U.S. Treasuries, Mortgage-Backed Securities, and other fixed-income securities. Although the Fed intends to let bond holdings run off the balance sheet as they mature, asset sales may slow if geopolitical tensions escalate and the economy weakens into the year.

(6) The Fed is not only its regulator and supervisor but now a key participant in the economy. Balance sheet reduction or the unwinding of these assets can lead to a soft landing via successful implementations of monetary/fiscal policies or a hard landing via policy mistake.

In summary, based on the above information, history hints at another cyclical stock market bear decline within a structural bull stock market trend (i.e., May 2013-present). Will the existing cyclical bear decline lead to another brief recession in late-2022 or 2023, marking the seventh cyclical bear in the past eleven U.S. recessions?

Geopolitical, macro-economic, and Fed monetary policies remain fluid and can abruptly change. History shows cyclical bear markets (6-months to 2-years) and structural bear markets (8 to 20-years) are equally painful for investors.

Based on the S&P 500 Index (SPX), a potential major market bottom may begin to develop along 3,500-3,800 since numerous pivotal technical convergences occur near this price range. Another 9% to 16% decline from the current level (SPX – 4,173.11) may be necessary to alleviate the overbought condition incurred from the March 2020-January 2022 rally and reset the marketplace back to its equilibrium level (fair market value).

The good news is that if this is another cyclical bear decline within a structural bull market, then this will mark another 4-year mid-term election year cycle low and another buying opportunity for investors. The bad news is if investment market psychology turns decisively negative into the decline, pushing the cyclical bear decline into the next structural bear market.

The previous ten (10) recessions and the bear market declines in the past 65 years:

2020 COVID-19 pandemic – Cyclical bear decline within 2013-present structural bull

2007-2009 Financial crisis – Secular bear/trading range of March 2000- May 2013

2001 Dot-com bubble – Secular bear/trading range market of March 2000-May 2013)

1990-1991 Persian Gulf War – Cyclical bear market within 1982-2000 structural bull

1981-1982 Double Dip recession/Monetary policy – Cyclical bear market within 1982-2000 structural bull

1980 Inflation and Fed Volcker rate hikes – 1966-1982 structural bear

1973-1975 Oil Embargo crisis and Stagflation – 1966-982 structural bear

1969-1970 Inflation and Vietnam War – 1966-1982 structural bear

1960-1961 Fed monetary policy – cyclical bear market within 1949-1965 structural bull

1957-1958 Fed monetary policy – cyclical bear market within 1949-1965 structural bull

1953-1954 Fed monetary policy – cyclical bear market within 1949-1965 structural bull

Source: Chart courtesy of

Source: Chart courtesy of

Source: Courtesy of National Bureau of Economic Research and Lee NY Holdings LLC.

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