Mid-Month Update: Riding the Bear to the Midterm Bottom
By: Jeffrey A. Hirsch & Christopher Mistal
June 16, 2022
On Monday of this week DJIA fell into an official Ned Davis Research (NDR) bear market. For decades we have used and relied upon NDR’s definitions of bull and bear markets in the annual Stock Trader’s Almanac and in our newsletters. NDR’s definition of a bear is more nuanced than the typical 20% decline from peak that is commonly used throughout media nowadays. An NDR bear market requires a 30% drop in the Dow Jones Industrial Average after 50 calendar days or a 13% decline after 145 calendar days and a new lower trough. Reversals of 30% in the Value Line Geometric Index also qualify. This time around, DJIA was at a new low, down greater than 13% after 145 calendar days on June 13, 2022.
This raises the question, “Where can we go from here?” In the table below we examine all the 13% DJIA declines after 145 days since 1948 and the subsequent action after. The four 30% Value Line Geometric reversal bear markets in 1987, 1990, 1998 and 2020 are included for reference.
[DJIA Ned Davis Research Defined Bear Markets since 1948 Table]
Of the eighteen others only the two reached bottom at the 13%, 145-day decline, 1953 and 2016. Eight were followed by further declines of less than 10% and eight greater. Twelve bottomed out less than three months later and six dragged on for 6 months or more. The average additional decline was 12.4% over an average of 139 calendar days. Based upon DJIA’s close on June 13 and these averages, DJIA could ultimately find bottom around October 31, 2022, at 26732.13. This would represent a total bear market decline of 27.4% in 298 calendar days.
[Midterm Years with Bear Market Bottoms since WWII]
These numbers align reasonably well with the typical post-election year high to midterm low since 1913 (STA 22, page 34). They are also consistent with our recent midterm year seasonal pattern charts and comparisons of 2022 to 1962, 1970 and 1974. The early Q4 bottom also aligns well with the beginning of the Sweet Spot of the 4-year cycle. Additionally, by early Q4, the Fed is currently projected to have significantly raised interest rates and midterm election results will be arriving soon.
Four Horsemen of the Economy
Now that the bear has been declared the $64,000 is when will the powers that be declare recession and how long and deep will it be. Let’s turn to our Four Horsemen of the Economy. Our updated Four Horsemen chart below from our 2022 Annual Forecast is clearly indicating at least a mild recession is likely already upon us. The “official” recession definition is two consecutive quarters of negative GDP growth. GDP has already come in negative for Q1 2022 and the Atlanta Fed’s GDPNow estimate for Q2 is now exactly zero as of today’s update.
The current readings from the Four Horsemen align closely with previous peaks and troughs associated with the beginning of a recession. Starting at the bottom, the Unemployment Rate has been rather low at 3.6% for three straight months. Historically, the Unemployment Rate has bottomed and turned higher at the outset of recessions. 
Our in-house inflation metrics plot the 6-month exponential moving average (EMA) of the year-over-year change in the CPI and PPI. It’s no secret that these high levels of inflation, not seen since the stagflation 1970s and the double-dip recession 1980s, are consistent with previous recessions. Plunging Consumer Confidence is also a clear marker of recession. But on the flipside, all these dire readings and “official” recessions line up with the low points of the DJIA on the top.
Four Horsemen of the Economy
In the four months between now and our projected midterm bottom, inflation could reach a peak and begin to subside. Russia and Ukraine could also arrive at some tenable ceasefire. If China can avoid further Covid-19 lockdowns, supply chains could turn the corner too. Any perceived improvement would be welcomed by the market. Until then, it is the “Worst Months” of the year and the Weak Spot of the four-year cycle. Caution and patience remain the best course of action.