The tenacity of this bear stock market reminds me of a famous line uttered by mob boss Michael Corleone in Godfather III: “Just when I thought I was out, they pull me back in.”

When September started, the overwhelming consensus was that the bear market had bottomed in June, and inflation was easing. The powerful summer rally supposedly was evidence that the worst was behind us.

Those hopes have been dashed. Monday is the first trading day of October, and we’ve closed the books on a week, month, and quarter that were all brutal.

The major reasons behind the deepening of the bear market:

• A more hawkish Federal Reserve, with no dovish pivot in sight for 2022;
• Monetary tightening by central bankers around the globe;
• Hotter-than-expected inflation in the U.S. and other major countries;
• Russian President Vladimir Putin’s escalating aggression in Ukraine;
• A looming energy crisis in Europe; and
• Economic slumps in China, the European Union, and the U.S.

As the following table shows, the bear market has deepened and the hefty gains of summer have evaporated:

Stocks fell last Friday, closing out the third quarter at a steep loss, the first time Wall Street has posted three consecutive quarters of losses since The Great Recession year of 2009.

For the week, the Dow and S&P 500 lost 3%, and the tech-heavy NASDAQ slipped 0.3%. For the month of September, the Dow and S&P 500 plummeted more than 9%, and the NASDAQ declined 10%.

For the third quarter, the Dow sank more than 7%, the S&P 500 fell 6%, and the tech-heavy NASDAQ lost nearly 5%.

Monday’s mojo…

We got encouraging news on inflation Monday. Let’s hope that this time, the good inflation news lasts and becomes more of a consistent trend.

The Institute for Supply Management (ISM) reported Monday that the U.S. Manufacturing Purchasing Managers’ Index (PMI) fell 1.9 points to 50.9 in September, which represents expansion that’s not too hot, not too cold. More importantly, the report also showed that price pressures at factories are easing, and supply bottlenecks are dissipating.

Accordingly on Monday, stocks kicked-off the month of October with a rally. The major U.S. stock market indices soared as follows: the Dow +2.66%; the S&P 500 +2.59%; the NASDAQ +2.27%; and the Russell 2000 +2.65%. All 11 S&P 500 sectors closed in positive territory, as Treasury yields declined, and oil prices soared. Bargain hunters decided to take advantage of beaten-down valuations, especially in the oversold tech sector.

Fears of a pending recession helped drive September’s losses. Here’s the silver lining: if a recession is averted, or turns out to be short and shallow, sentiment may turn bullish again, as it did Monday. Wall Street, after all, is an expectations game.

The data don’t point to a sharp recession. Jobs growth and consumer spending remain strong. Inflation expectations are declining. Businesses are still making investments for the long haul.The falling price of crude oil, albeit an indicator of a slowing economy, is helping the fight against inflation. (Crude may soon pop higher, though, as OPEC+ weighs huge cuts in production.)

Most of the downside in equities may have already occurred. The big question, of course, is how to spot a market bottom. We can point to a few indicators.

For starters, we’d need to see signs that inflation has peaked. We’ve gotten “head fakes” on inflation all year. Fact is, these aren’t normal times. The lingering damage from the COVID pandemic and the vagaries of the war in Eastern Europe have thrown economic orthodoxy into a cocked hat.

We’d also need to see bond yields stabilize and start to come down. The benchmark 10-year U.S. Treasury yield so far in 2022 has shot from 1.5% to 3.64%.

The U.S. dollar, which currently hovers at a 25-year high, also would need to come down. That dynamic would occur ahead of an anticipated pause in the Fed’s rate-hiking cycle.

Read This Story: London Calling: How Britain’s Folly Affects You

The political farce in Britain is exacerbating the volatility of global financial markets. The new government of Tory Prime Minister Liz Truss has proposed unfunded tax cuts, despite high inflation and central bank tightening. In response, investors have abandoned the British pound for the U.S. dollar.

In a humiliating u-turn, Truss on Monday walked back some of those tax cuts. The antics of foreign governments always pose a wild card for investors.

Which brings me to Vladimir Putin, whose surprisingly inept military is losing in Ukraine. The desperate dictator has been making unhinged threats and he may yet provide global financial markets with a “black swan” event (e.g., the use of tactical nukes on the battlefield).

A prudent move would be to hedge your portfolio with “defensive growth” plays, such as health care, utilities, and consumer staples. These sectors have performed comparatively well year to date. Also make sure your hedges sleeve contains gold, which tends to soar in price during geopolitical crises.

The week ahead…

We face a particularly busy week of scheduled economic reports. In the coming days, keep a close eye on these data releases:

S&P U.S. manufacturing PMI, ISM manufacturing index, construction spending, and motor vehicle sales (Monday); job openings and factory orders (Tuesday); ADP employment report, S&P services PMI, and ISM services index (Wednesday); initial jobless claims (Thursday); non-farm payrolls, unemployment rate, average hourly earnings, and labor force participation rate (Friday).

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John Persinos is the editorial director of Investing Daily.

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