Bear Markets Rallies vs. New Bull Markets

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Bear Markets Rallies vs. New Bull Markets

How does an investor tell the difference between a bear market rally and the beginning of a new bull market?

Many investors asked the question over the summer. The big decline in stock indexes that reached bear market levels in the first part of the year suddenly reversed course. Stock indexes began a substantial rally starting in late June.

It is not unusual for stock indexes to have periods of substantial gains during long-term bear markets. Look at charts of stock indexes for the periods of 2000-2003 and 2007-2009.

Those were long bear markets, but several times during the bear markets the indexes had meaningful rallies.

The problem is what some call “sucker rallies” or “bear market traps” that can cause investors to increase their stock allocations because they looked like the beginnings of new bull markets. Instead, the rallies fizzled, and stock indexes sank to new lows.

Some traders like to look at short-term technical indicators to assess whether a rally is the beginning of a new bull market. They examine data such as the percentage of stocks making new short-term highs and the percentage of stocks trading above a short-term moving average such as the 50-day moving average. In a new bull market, the percentages usually are very high, often around 90%. In a bear market rally, a lower percentage of stocks will be leading the rally.

A distinguishing feature of a new bull market is that economic data and earnings improve. The problem is that economic data and earnings are reported only after lags. Stock prices could be well above their bear market lows before the economic and earnings data confirm a new bull market.

To find real confirmation of a new bull market, you need to look at what the Federal Reserve is doing and saying. Is the Fed easing monetary policy and looking to reduce unemployment? That’s likely the beginning of a bull market. Or is the Fed concerned about reducing inflation? That’s a sign that there’s more pain to come.

At this point, the Fed says it plans to continue tightening monetary policy, reducing economic growth and fighting inflation. The short-term technical indicators were showing some promise as the summer progressed, but new statements from the Fed in late August caused the indicators to reverse course.

U.S. Life Expectancy Declines by Two Years

Average life expectancy in the U.S. declined for the second year in a row, according to the Centers for Disease Control and Prevention (CDC).

From 2019 to 2021, average life expectancy fell by 2.7 years to 76.1, about the same as in 1996. That’s the worst two-year decline since records first were kept in 1923.

COVID-19-related deaths contributed to 74% of the decline in 2020 and 50% of the decline in 2021. The second-largest cause of the decline was “unintentional injuries.” The primary contributor in that category was drug overdoses.

Life expectancy is an important consideration in retirement planning. An estimate of life expectancy should affect decisions such as when to claim Social Security benefits, how much money can be spent safely each year, plans for long-term care, and more.

Most people shouldn’t change their plans because of the new data.

If you made it through the COVID-19 pandemic and are vaccinated, there’s a low probability COVID-19 will accelerate your demise. If you’re not taking or addicted to opioids or other substances, the other cause of lower life expectancy doesn’t affect you.

The long-term data show that those with more education and higher incomes have longer life expectancies than the average. Also, individual habits and genetics have strong influences on individual life expectancy.

Online life expectancy calculators are good tools to use. Start with www.lifeexpectancycalculators.com or do a web search for “life expectancy calculators.”

Beware of Medicare Advantage Plan Errors

Medicare Advantage plans are very popular. About 40% of Medicare beneficiaries now are enrolled in the plans, and projections are that the plans soon will provide care to more than half of beneficiaries.

One feature of the plans is that beneficiaries must use medical providers in the plan’s network to receive maximum coverage of their expenses. In addition, the plan must approve many types of care and treatment in advance.

A problem is a plan might deny care that should have been approved. When that happens, the beneficiary has to appeal the decision, go without the care, or pay for the care out of pocket.

A recent report from the Office of Inspector General of the Department of Health and Human Services found the claim denial rate at Advantage plans is fairly high.

The IG looked at 250 authorization denials and 250 payment denials at 15 large Advantage plans that occurred during one week in June 2019.

The IG found about 13% of authorization requests were denied improperly, as were 18% of payment requests. In some cases, those reviewing the requests overlooked documents that were available and would have changed the decisions.

In other cases, the reviewers used rules or standards for treatment that conflicted with Medicare’s criteria. For example, the plan might require a CT scan before approving an MRI when Medicare’s standards allowed the MRI first.

Unfortunately, the IG didn’t identify which plan sponsors had the most errors or provide other valuable details.

There are benefits to Advantage plans. But the potential for care or payment to be improperly denied is a drawback.

The Data

The service sector improved a bit in August, according to the ISM Non-Manufacturing Index. The index increased to 56.9, up from 56.7 in July. August’s level was the highest for the index in four months.

The prices component of the index increased at the lowest rate since January 2021. Employment and new orders each improved.

The ISM Manufacturing Index in August was 52.8, the same level as in July and remains the lowest level since June 2020.

New orders improved, and price increases were much lower. Employment increased.

But the economy slowed again in August and activity contracted, according to the PMI Composite Final Index for the economy.

The Services Index declined to 43.7 from 44.1 in July. The Composite Index for the economy fell to 44.6 from 45.0 in July.

The PMI Manufacturing Index for August was 51.5, a slight improvement from 51.3 in July.

Productivity declined 4.1% in the second quarter, which followed a 7.4% productivity decline in the first quarter. Over 12 months, productivity declined 2.4%, which is the largest 12-month decline in productivity since the first quarter of 1948.

Because of the lower productivity, unit labor costs increased 10.2% in the second quarter. That follows a 12.7% increase in labor costs in the first quarter. Over 12 months, unit labor costs increased 9.3%, which is the highest increase since 1982.

Factory orders declined by 1.0% in July. That compares to a 1.8% increase in June.

Excluding the volatile transportation sector, factory orders declined by 1.1% in July, which follows a 1.0% increase in June.

In last Friday’s Employment Situation reports, the number of jobs increased by 315,000 in August. That compares to the 526,000 jobs added in July.

Average hourly earnings increased 0.3% in August, down from a 0.5% increase in July. Over 12 months, earnings increased 5.2%, the same rate as in July.

The labor force participation rate increased from 62.1% in July to 62.4% in August.

New unemployment claims declined by 5,000 to 232,000 in the latest week. That’s the lowest level since the week ending June 25.

Continuing claims increased to 1.438 million from 1.412 million the previous week.

The Markets

The S&P 500 lost 1.87% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 1.84%. The Russell 2000 declined 3.42%. The All-Country World Index (excluding U.S. stocks) decreased 2.72%. Emerging market equities eased 2.52%.

Long-term treasuries lost 4.64% for the week. Investment-grade bonds dropped 2.91%. Treasury Inflation-Protected Securities (TIPS) fell 1.99%. High-yield bonds decreased 0.62%.

On the currency front, the U.S. dollar rose 1.44%.

Energy-based commodities declined 4.57%. Broader-based commodities lost 5.16%, while gold fell 1.35%.

Bob’s News & Updates

My next book will be “Retirement Watch: The Essential Guide to Retiring in the 2020s.” The official publication date is Jan. 3, 2023. You can make a pre-publication order or learn more about the book by clicking here and here.

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