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Bear Market: Did We Hit Bottom in October?

Published 11/08/2022, 10:30 AM
Updated 07/09/2023, 06:31 AM
  • The broad selloff witnessed in the first nine months of 2022 appears to have stalled—at least for now
  • U.S. midterm elections could give stocks another push in the upcoming months
  • However, investors must avoid getting too euphoric; risks remain in place

October was a great recovery month for the U.S. stock market, with the S&P 500 jumping 8.8%. November started off a bit slower, with the U.S. benchmark index losing -1.68% in the first five days of trading. However, needless to say, the selloff witnessed during most months of 2022 seems to have paused for the time being.

With the U.S. midterm elections today, we could get another bullish tailwind should we see a change in Congress and Senate composition. Furthermore, the U.S. market has a history of rallying after midterms regardless of the winner.

However, as always, we cannot get euphoric about the current market phase—just as we should not have gotten desperate earlier this year. The key is always to maintain rationality and clarity.

But let’s take it step by step.

Below, I have put the performance of the different asset classes from the beginning of the year to date. As you can see, on the positive side, we find only energy, commodities, and real estate. Among the worst performers are technology and telecommunications.

Relative Sector Returns in 2022

Source: BofA

Now, is this really a bear market or a correction (very strong, for goodness sake) of the long-term bull market that started back in 2009?

P/E Ratios in Previous Bear Markets

From the picture above, we see how on average, at the bottom of a bear market, valuations (here, the P/E ratio relative to the S&P 500 index) were around 11.7X on average. Today, in early November, this same value is traveling around 16.7X, meaning that only in 2002 had we had higher valuations at a market bottom.

In all this, let us remember that the worst decline from the highs in this bearish phase was, to date (should the October low be the definitive one), about 27.6%, so a meaningful decline, but compared to the historical data, not so extreme.

S&P 500 Daily Chart

So again, we are still finding out whether or not the mid-October low was a bottom for the market. However, I have been slowly buying diversified ETFs and individual stocks over the past few months with an eye on the long-term horizon.

I’ve also been buying some individual stocks for the short term, considering that they might be undervalued at current levels, however, with greater due diligence. Recently, I turned profits in both Meta Platforms (NASDAQ:META) and Netflix (NASDAQ:NFLX).

Of course, buying when everything goes up is easier emotionally. The tricky thing is to do it when everything goes down; you might be labeled as crazy for the duration of the bear market, but then you reap the rewards.

As David Rubenstein, the co-founder of Carlyle Group recently said:

“People shouldn’t be afraid of going in and buying things now. The great fortunes in the investment world are often made by buying things at discounts.”

We’ll see if that turns out to be the case this time.

In the meantime, I ask your opinion: Have we reached a bottom?

Write it down in the comments.

Disclosure: The author has closed his positions in both Netflix and Meta. He is currently still long on the S&P 500.

Latest comments

That is the million dollar question. We have not see rhe vix spike above 35 and cause so much fear that we finally capitulate. Perhaps my emotions want to see capitulation but maybe the market doesn’t give it to us this time?
the bottom is still far off
Historical debt levels. I’m keeping one bag packed.
No only down to zero then it’s bottom
After midterms the next rate hike will be 100 basis points
Nope
The fake Fed "pivott", the possible republican congress...investors will find a reason to buy.  That is why barring really bad news the default direction is always up.
No and still going down to bankrupt
No bottom! Market annalysts are so Naïve! We have not even seen the last of rate hikes or the recession coming.
I think that the current Shiller P/E Ratio: 28.18 gives a more accurate picture of the market, which is still expensive, because it takes the average of the earnings over 10 years deflated by inflation the problem with the P/E Ratio is that the 2023 earnings have to integrate the coming recession and this work is not done yet, in which case the PE is higher than the current valuation.
we are in a bottom at the end of the year 4000S&P
The year 4000? Where do you come from?
try reading it again. He said by the end of the year 4000ES
Doesn’t matter about Congressional elections. Nobody can fight the drying up of liquidity
National debt at highest level since WW2, Corporate debt at highest level ever, Inflation at highest level in 40 years, interest rates rising, global recessions, QT, labor shortages, Fed balance sheet sell off. I for one will not invest again until the market falls back to pre covid levels, as since then, it has only risen due to QE / Fed printing presses and $8 Trillion in artificial stimulus. SOO I wont invest until Dow back under 25k, Nasdaq under 8k and S&P is under 3k (which I can see by next summer.... with QT / inflation / global tensions, global recessions etc etc). Only reason the stock market hasn't fallen further is a huge over money supply, which is also why inflation is so bad, as you cant end one without ending the other
Exactly.
Well put. Thank you.
To put is simply and straight. Good comment!
If your 401k has lost money you will more easily believe that we have hit bottom.
give it till February and will know
capitalism has a crisis every seven to 12 years. The government has been bailing it out since they realized that modern corporate capitalism is on this cycle.Mainly because it's now the equivalent of a perpetual motion machine. Fiat currency and Fiat economy. Markets will rise again but anyone who thinks they can pick tops or bottoms is delusional. It's a random walk. The fog of the future so to speak. When or if the government stops intervening the system will collapse. Call it socialist or call it structured. The terms are only political propaganda. Capitalism needs careful management to work not just random market forces.
capitalism is a system that will take care of itself if allowed to. powers to be love to be in power
history tells a different story John....unrestrained capitalism will eventually destroy itself .... it always ends up with corporations building monopolies and creating unlimited corporate power.
but socialism is so much better? Socialism leads to authoritarianism, which leads to Communism which has always led to failure, economically and socially.
yes we hit the bottom. macroeconomicly we are doinh great, inflation is at a 40yo high (developed markets) as we wished, unemployment at all time lows, so no wages pressure, interest rates at low values, stocks still overvalued.. as you see, everything is right.. i can already see the amazing year of 2023 for the middleclass and retirees.. everything is fine, everything is just fine
and nothing can go wrong, go wrong, go wrong
We absolutely have reached the bottom. You can't compare the markets now to the markets in the past. Over the past two year regular retail people have been able to invest for free. That money is huge in the market. And retail buys every dip without fail, never selling
Really??? You tell a 20 year old retail investor they just lost half their money and they will run for the door. Profits are falling, consumer confidence is being eaten into by rising prices, companies have started to make mass lay offs, global recessions have been called for almost half the planet. THE ONLY positive the market has is an oversupply of money and guillible / greedy retail investors who will be stepping over one another for the exit if any kind of shock....
Plus a lot of this retail investor was via cheap fed debt. With interest rates set to hit 5%+ by early next year, bond yields at 4%+ - those days of cheap debt are over for the forseeable future with a lot to be burnt who bought on margin / have high mortgages etc
With 17X PE, we can’t say we have already seen the bear market bottom: 1. Bear market bottoms were at 13/14X PE in 2002/2009 when interest rates were falling. Now with interest rates going up, we may see at least 11x PE in the current bear market. 2. During the  last three decades , we have enjoyed the benefits of globalisation, cheap products from china which helped the world to have low inflation and therefore low interest rates. These factors are going in the opposite direction. 3. Demographic conditions have changed everywhere. Many major economies will look like Japan in the next one or two decades.  Markets need to see further correction of at least 30 percent to reach bear market bottom
No. There will be enormous year-end tax-loss selling by all the bankers like Goldman and JP Morgan shortly. Add on top of that the tectonic shift caused by the demise of the petrodollar entailing the disabling of unlimited money printing, you have a HUGE financial crisis dead ahead. The epicenter will be the US and its vassals like the EU. The dollar is a trap into which you've all been corralled awaiting your financial annihilation. Good luck to you all whilst you're whistling past YOUR OWN graveyard discussing irrelevant nonsense like P/Es of stocks about to crash.
Gold?
Yes.
Keep it simple. The Pandemic started and the street ignored it and the obvious implications tht was telegraphed some 100 years earlier.  The start of 2022 with Inflation rearing its ugly head. the street ignored it until it actually affected the earnings picture. TODAY we are in the same situation. This time it is earnings. Morgan Stanley in last 24 hours LOWERED the 2023 earnings picture by a significant amount. This was lowered from yesterdays assumptions.  market rallying here is absolutely INSANE!  Inflation can't be talked about as transitory, a silly discussion to start. Wages, tight labor market, employment, reduced productivity, JOLTS, Job quitting rate not seen in 30 years. Inflation data not dropping one bit. Housing bubble of enormous proportions.  By 6/23 expect the market to be HALF of what it is today.  We have transitioned from a 40 year disinflation environment to inflation like the 80's.  this time around the economic structure will not survive intact.  KISS
smart man
Elliott Wave Analysis on nifty index shows a bearish sign after a new high. I don't think October was the bottom.
Only way inflation come down
We haven't reached the bottom under the old trading fundamentals. Black Rock proxy trading desk at the treasury will ensure the mid terms pump indices until Christmas. How else have we achieved a bull market when 80% economic world key indicators are in reverse or negative. ? Bond markets are reflecting true scenario as we speak. Hence why in my town most businesses are folding.
it is yet to be seen.  as with any tank like episode, the fear outweighs any rationalization for almost anyone to some degree. It is usually an overreaction.  I believe the overreaction has completed. I also believe that the move up given fed uncertain direction will keep it in pause mode for quite some time.  Perhaps a year or more.
When the sentiment is all negative amd gloom and doom, you know itd bottomed out.
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