Shares in the United States rallied after the US CPI report showed lower-than-expected inflation at 7.7% instead of the forecasted 7.9%.
Lower inflation, which may slow interest rate hikes, was all investors needed to shift sentiment and lift the markets.
The S&P 500 jumped 5% in a single day, leaving many investors wondering whether the market has reached its bottom.
It also raised the question of whether the rally was another bear market rally or the start of a new bull market.
Technology equity analyst Irnest Kaplan commented on the issue in a tweet on 12 November, warning that investors should not get too excited yet.
He noted that while you can never be sure where the market bottom is, he would like to see more good news to signal the end of this bear market.
There are often strong rallies in bear markets. The dot-com crash in 2000 saw three rallies above 30% in the NASDAQ on the way down.
Compared to the dot-com crash, the current bear market has also seen three rallies, including the current one. However, not one of them has exceeded 20%.
Kaplan also noted that while the current rally has surpassed the 50-day moving average, it has not yet gone above the 200-day moving average.
There are two other risk factors to keep in mind before jumping into the market, assuming it is set to rise – the inverted yield curve and China’s Covid-19 cases.
The slope of the 2-year to the 10-year US Treasury yields remains negative (-0.52%) and has been inverted for more than 130 days.
While not all inverted yield curves lead to a recession, it has been one of the most accurate indicators that a recession might follow.
The deeper the inversion and the longer it lasts, the more likely the recession.
China saw a spike in new Covid cases last week, with over 24,000 new cases.
It brings the country close to the peaks experienced in April when Shanghai was forced into lockdown.
Depending on how strongly the Chinese Communist Party (CCP) sticks to its zero-Covid policy, this could lead to renewed supply chain disruptions, and inflation could flare up again.
Another consideration is that the market remains expensive.
The Buffett-indicator – the ratio of total US stock market value divided by GDP – sits at 148%, higher than at the peak of the dot-com bubble.
The S&P 500 Shiller PE ratio – the current price divided by the average inflation-adjusted 10-year earnings per share – is also much higher than the historical average.
|Valuation Ratio||Current Value||Peak of dot com bubble||Historic Average|
|S&P 500 Shiller PE ratio||28||44||17|