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Bear market rallies are the new norm 'for now,' top strategist says

·Anchor, Editor-at-Large
·2 min read
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The new norm for the stock market after a wild May, according to top strategist Liz Ann Sonders at Charles Schwab, may bear market rallies: i.e., large rallies followed by larger drops that keep markets in a broader decline.

"For now," Sonders told Yahoo Finance Live on if investors should be bracing for more bear rallies ahead (video above). "We did with the rally that we saw last week, you saw some improvement in breadth. You did see some shorter term technical triggers suggesting that there could be legs to the rally. But the kind of significant breadth thrusts as they're called... we didn't quite get that."

The S&P 500 index ended a seven-week losing streak last week and posted its best week since Nov. 2020, rising by more than 6.5%, while the Dow Jones Industrial Average and Nasdaq Composite tacked on 4.2% and 5.2%, respectively.

But on the Tuesday after the long Memorial Day weekend, the S&P 500 fell 0.6% in a choppy session as traders locked in on the rampant inflation narrative as President Biden met with Fed Chair Jerome Powell. The Dow dropped 0.7% and the Nasdaq slipped 0.4%.

On Wednesday, the choppiness continued as stocks fell despite an upbeat quarter and outlook from tech bellwether Salesforce.

Observers assigned the pullback to weak manufacturing data that was quickly followed by headlines created by JP Morgan CEO Jamie Dimon, who said at Bernstein's Strategic Decisions Conference the U.S. economy is facing a "hurricane" as the Federal Reserve continues its process of normalizing interest rates.

A summer rainbow amid a thunderstorm in Encinitas, California on August 20, 2014. REUTERS/Mike Blake
A summer rainbow amid a thunderstorm in Encinitas, California on August 20, 2014. REUTERS/Mike Blake

So far in 2022, the Nasdaq is down more than 20% — so technically in a bear market — while the S&P is down more than 13% and the Dow is down nearly 10%.

Sonders said investors need to be extra vigilant in this type of volatile backdrop, where headlines such as those from Dimon could rattle already nervous markets.

"What we saw last week is what you tend to see in bear markets," Sonders said. "Trading around them is certainly a possibility. I just think for shorter term investors, rallies look a little more ripe for trimming into then sell-offs look ripe for adding risk in portfolios."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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