Stocks came back swinging last week, prompting some media outlets to prematurely declare the bear market dead…until we got hit with Monday’s modest declines.

Last week’s surge wouldn’t be the first head fake we’ve faced since this broader market decline started. Did we witness a bear market rally, or the beginnings of a lasting rebound?

A bear market rally occurs when stocks that have been sharply falling seem to be reversing their fall but are only pausing before they resume heading south. This dynamic happens when excessively optimistic investors misinterpret or ignore bearish indicators.

It’s foolhardy to try to time a market bottom. The indices initially extended their rally Monday, but the effort fizzled in the final hour of trading.

The major U.S. stock market indices closed Monday as follows: the Dow Jones Industrial Average -0.20%; the S&P 500 -0.30%; the NASDAQ -0.72%; and the Russell 2000 +0.34%. Interest-rate sensitive growth stocks, particularly mega-cap tech names, pulled the market down.

In pre-market futures contracts Tuesday, U.S. stocks were trading in the green. China announced Tuesday that it was easing COVID restrictions, cheering global investors and lifting European and Asian indices.

The week ahead…

Keep a close eye this week on the following events:

• On Wednesday, Federal Reserve chair Jerome Powell is scheduled to meet with his European counterparts, to discuss monetary policy in the U.S. and Europe. From their remarks, we’ll get further clues as to the degree of hawkishness we can expect.
• On Thursday, the U.S. Bureau of Economic Analysis will release the latest reading of the Personal Consumption Expenditures (PCE) price index. The PCE is crucial because it’s the Fed’s inflation gauge of choice.

The PCE index measures inflation based on information from households, corporations, and governments, along with gross domestic product. When the Fed discusses a long-term inflation target, it’s referring to changes in the PCE.

Read This Story: How to Play an Inflation-Driven Bear Market

The S&P 500 jumped 3.1% last Friday, its biggest one-day gain since May 2020, and 6.4% for the week. That said, all S&P 500 sectors are down for the month.

The biggest issue now is that we’re quickly coming up on the end of the second quarter. Thursday is the last trading day for Q2 and mutual funds and hedge funds will soon be compiling their holdings disclosures and shareholder reports based on their holdings that day.

The vast majority of mutual funds are required by their mandates to remain at least 80% invested, so I suspect that a lot of managers are putting on positions right now in anticipation of compiling their reports.

The Putin effect…

Investors increasingly fear a recession, amid headlines about war, inflation and rising rates. At its meeting this week, the G7 announced further sanctions against Russia, which squeeze the country but also boomerang to hurt Western economies.

The global economy was on course for healthy projected growth, until Russian President Vladimir Putin decided that Ukraine belonged to Mother Russia and launched his invasion (see chart).

Many of the worst affected countries will be in Europe, which is especially vulnerable to the Russia-Ukraine war due to energy imports and the influx of refugees. As for economically beleaguered Russia, the country defaulted on its foreign debt Monday for the first time in a century.

The U.S. economy nonetheless faces many positives, including robust jobs growth, respectable (albeit decelerating) corporate earnings growth, and a resilient housing sector.

The National Association of Realtors reported Monday that its Pending Home Sales Index, which tracks the number of homes that are under contract to be sold, rose 0.7% on month to 99.9 in May.

The consensus of economists had called for sales to fall 4% on month. The unexpected jump in pending home sales in May was mostly driven by a sharp 15.4% monthly rise in the U.S. Northeast. The national increase snapped a six-month skid and occurred despite rising rates and home prices.

This latest housing data is a signal that cyclical growth could spark a relief rally this summer. Stay cautious but stay invested.

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John Persinos is the editorial director of Investing Daily.

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