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Posted by: thepinetree on 08/17/2022 07:26 AM Updated by: thepinetree on 08/17/2022 07:26 AM
Expires: 01/01/2027 12:00 AM

Bear Market Rally or New Bull Market? ~ from Sabrina Julian

Murphys, CA...In their latest commentary, the Cetera Investment Management Team discusses the recent rebound in equities and if it is going to be a bear market rally or an eventual bull market. Bear Market Rally or New Bull Market? Stocks are rallying off their June bear market lows. Valuations are rising, but less than 50% of S&P 500 stocks are above their 200-day averages. Inflation and the Fed remain investors’ focus, so volatility will continue.

After losing nearly 20% the first half of the year, the S&P 500 is up over 13% since June 30. Pessimism turned to optimism, as inflation is showing signs of easing and thus the Federal Reserve may not have to raise interest rates as much as previously expected. Higher interest rates are a headwind for economic growth and corporate earnings.
The big question on investors’ minds is whether this recent rebound in stock prices will be sustainable or just a bear market rally. Stocks do not go straight up nor straight down, so some fear this rally will not be sustained, and stocks will eventually continue their downward trend. Answering this question is difficult, but we can look for clues in equity market fundamentals, technicals, and even the bond market.

Fundamentals such as corporate earnings have largely beaten expectations this earnings season. The S&P 500 price-to-earnings (P/E) ratio peaked over 24X forward earnings in September 2020 when investors bid up stocks on fiscal stimulus news. Since that peak, the P/E ratio has been falling and dipped under 15.5 in June of this year. This is important because this is near the 20-year average. Currently, this ratio is above 18 and starting to raise concerns that the stocks could be getting overpriced again. While no longer cheap perhaps, these valuations are still lower than February 2020 pre-pandemic level.

The potential that we are past peak inflation could help slow the pace of Fed hikes and increase future earnings estimates. The big fundamental point to watch is the magnitude of Fed rate hikes. Investors are grappling with whether the Fed will raise rates 0.50% or 0.75% at its next meeting on September 21. If the Fed feels the need to remain aggressive, this could hurt stock prices. If the Fed is confident that inflation is headed in the right direction, stock markets could continue their ascent higher. The good news is that we will also get a plethora of important economic data and Fed thoughts before the next meeting.

Looking at technicals, technicians like to watch the 200-day moving average on the S&P 500. If the S&P 500 can remain above that average for a sustainable period, it suggests a legitimate rally. If it cannot, it could be a sign of just a bear market rally. The S&P 500 hasn’t closed above that threshold since April 7 but is currently less than 1% below the 200-day moving average. If we look at stock market breadth, over 90% of stocks in the S&P 500 are above their 50-day moving average and only 46% are above their 200-day average, so there could be room for more upside as companies push above these longer averages.

If we focus on the bond market, we can get some more insights. Bond investors also think we are past peak inflation and are bidding up bond prices, sending bond yields lower. The 2-year Treasury yield can be an indicator of where bond investors think the Fed Funds rate will be in a year from now. This yield is currently 3.25% and off its peak of close to 3.50%. The current Fed Funds target range is 2.25% to 2.50% with Fed Funds Futures probabilities points to either another 0.50% or 0.75% hike in September. This would put the Fed Funds rate close to what the bond market is currently expecting. Although, bond investors may be expecting more rate hikes and subsequent rate cuts next year.

We are at an important fork in the road in terms of market direction. We have had a nice rally on optimism around peak inflation and the notion that investors have already priced in an economic slowdown. Important economic data and Fed direction will help discern how much longer the rally can be sustained. Furthermore, the stronger dollar, quantitative tightening, and the not yet felt effect of already instituted rate hikes on the economy may also keep Fed rate hikes in check on a go forward-basis.

Regardless of what transpires next, we do believe market volatility will be elevated as investors grapple with it and react to the day-to-day deluge of economic data, including inflation readings, and geopolitical risks. In this environment, please continue to work with your financial advisor to make sure you are properly diversified to help mitigate market volatility and your portfolio is aligned with your long-term investment objectives.

This report is created by Cetera Investment Management LLC. For more insights and information from the team, follow @CeteraIM on Twitter.
About Cetera® Investment Management

Cetera Investment Management LLC is an SEC registered investment adviser owned by Cetera Financial Group®. Cetera Investment Management provides market perspectives, portfolio guidance, model management, and other investment advice to its affiliated broker-dealers, dually registered broker-dealers and registered investment advisers.

About Cetera Financial Group
“Cetera Financial Group” refers to the network of independent retail firms encompassing, among others, Cetera Advisors LLC, Cetera Advisor Networks LLC, Cetera Investment Services LLC (marketed as Cetera Financial Institutions or Cetera Investors), Cetera Financial Specialists LLC, and First Allied Securities, Inc. All firms are members FINRA / SIPC. Located at 655 W. Broadway, 11th Floor, San Diego, CA 92101.

Individuals affiliated with Cetera firms are either Registered Representatives who offer only brokerage services and receive transaction-based compensation (commissions), Investment Adviser Representatives who offer only investment advisory services and receive fees based on assets, or both Registered Representatives and Investment Adviser Representatives, who can offer both types of services.

The material contained in this document was authored by and is the property of Cetera Investment Management LLC. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by affiliated and non-affiliated registered investment advisers. Your registered representative or investment adviser representative is not registered with Cetera Investment Management and did not take part in the creation of this material. He or she may not be able to offer Cetera Investment Management portfolio management services.
Nothing in this presentation should be construed as offering or disseminating specific investment, tax, or legal advice to any individual without the benefit of direct and specific consultation with an investment adviser representative authorized to offer Cetera Investment Management services. Information contained herein shall not constitute an offer or a solicitation of any services. Past performance is not a guarantee of future results.
For more information about Cetera Investment Management, please reference the Cetera Investment Management LLC Form ADV disclosure brochure and the disclosure brochure for the registered investment adviser your adviser is registered with. Please consult with your adviser for his or her specific firm registrations and programs available.

No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The opinions expressed are as of the date published and may change without notice. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision.

All economic and performance information is historical and not indicative of future results. The market indices discussed are not actively managed. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information.

Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.

A diversified portfolio does not assure a profit or protect against loss in a declining market.

Sabrina Julian
(209) 890-7491
Sabrina Julian Investment Services

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