December 12, 2022

The latest stock market rallies could be more fragile than you think.

As I mentioned last week, a positive dose of inflation news sent markets soaring, even though year-over-year inflation remains at its highest levels since the 1980s. Despite these pesky facts, rallies occur – the S&P 500 was up about 12% during its latest run.

These flashes of positivity in otherwise bearish conditions fill people with optimism. Some even think the Federal Reserve will ease up on its tightening. But bear market rallies are real. Just because they pop up occasionally doesn’t mean the greater pain is done yet.

In many cases, bear market rallies are just upward blips during a strong-flowing avalanche of losses. Just a hint of good news can lead to outsized rallies, even when major obstacles continue.

In March we saw an 11% rally. In June, the S&P 500 rallied 17% from trough to peak. People thought the bad times were over. But inflation persisted and the Fed kept tightening.

As of this writing, the market is up more than 10% from its latest valley. Optimism will likely follow, especially with the holidays nearby.

Yet, inflation is still here. The Fed is still looking to tighten. And huge companies are laying off thousands of workers.

There are still major pain points for stocks, no matter how much we wish there weren’t. This battle to tame inflation and grow the economy again is ongoing, perhaps for a while.

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