What Is a Bear Market Rally? What It Is, How It Works, and Example

Economic indicators are measurements, such as GDP, inflation, unemployment figures, and retail sales, that gauge an economy’s present and future financial health. The stance of central banks has an important role in the stock market’s direction and the rally’s power that fuels stock market price increases. A dovish federal reserve can be a key momentum driver in broad market rallies. Stock rallies are triggered by increased investor confidence, reduced risk, and frenzied buying activity.

In another well-chronicled October, this time in 1997, the Dow Jones Industrial Average slid more than 7% on Monday, the 27th. However, the next day, Tuesday, Oct. 28, stocks rebounded sharply, ending the session up nearly 5% on then-record volume. While markets have experienced some volatility, they have rebounded quickly after the factors causing sell-offs eased. I’ve personally invested over $270,000 with Fundrise, and they’ve been a trusted partner and long-time review narrative and numbers sponsor of Financial Samurai. With a $10 investment minimum, diversifying your portfolio has never been easier. Consider Fundrise, a platform that allows you to 100% passively invest in residential and industrial real estate.

Additionally, investors’ confidence in the Federal Reserve’s ability to keep interest rates fxcm broker low and provide market liquidity also contributed to the rally. Technological advances, changes in laws that may drive consumer behavior, and industry-wide trends can also be factors in the rise of stocks. All of these events cause investors to become more confident in a company’s ability to generate strong returns. As investor confidence increases, so does share demand, which causes their prices to appreciate, leading to a stock rally.

He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Fundamentally though, your reaction will also vary depending on whether you’re a long-term investor or short-term trader.

• The MOSES Index ETF Investing Strategy will help you minimize the impact of major stock market crashes.
• It is an investment that combines the income stability of bonds with greater upside potential.
• A bear market is defined as a decline of more than 20% from the high in investment prices.
• Additionally, you can use our favorite stock charting software, TradingView, to keep track of stock prices.

The January Effect: Riding the Wave Into the New Year

From post-Thanksgiving momentum to the potential for January gains, the year-end rally could have something in its bag for every investor. If the economy is worsening, a market recovery is likely to be short-lived. If indicators are improving, you might be witnessing the beginning of a bull market.

By tracking the ratio of these two indicators, traders and investors can identify when buying or selling pressure is increasing. It occurs when prices are rising and there is optimism this trend will continue for a long time. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate.

“I think we’re in the stages of a classic year-end rally,” Pelosky said in an interview with Bloomberg on Friday. You want to be a successful stock investor but don’t know where to start. Stay on top of upcoming market-moving events with our customisable economic calendar. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. George Ball, chairman of Sanders Morris Harris, says the combination of rising U.S. wages and low unemployment is likely enough to keep the S&P 500 on a bullish path for now.

Underlying Causes of Rallies

Our strategic partnerships with trusted companies support our mission to empower self-directed investors while sustaining our business operations. Short selling during rallies is incredibly risky, as rising prices can lead to exponential losses. Short selling is a strategy for professional ifc markets review institutions, and they only use it as insurance against downside risk. Over the past century, the US stock market has had 6 major crashes that have caused investors to lose trillions of dollars. The example chart above shows the rally after the announcement of low interest rates and mass government stimulus after the Coronavirus outbreak in 2020.

Rising inflation

As prices fall, more and more investors assume that the next rally will mean the end of the downtrend. Eventually, the downtrend will end (in most cases), but identifying which rally turns into an uptrend, and not a sucker rally, is not always easy. A rally is caused by a significant increase in demand resulting from a large influx of investment capital into the market.

“And since valuations are more elevated now relative to the last couple of years, that means on paper, the scope for further gains is now more limited,” he added. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. For one, inflation could prove much more entrenched than the Wall Street bulls expect. Then, beyond the Fed, there’s the risk that plenty can still go wrong for the economy. But there are big dangers in fighting the Fed, as the famous market adage goes. Some optimists believe the Fed will make an abrupt U-Turn and pivot to cutting interest rates as early as this year, after raising them one last time, likely at its March meeting.

Meanwhile, another key group of investors is “off sides,” according to Pelosky. Commodity trading advisors, or CTAs, have also been heavily shorting stocks recently, which hints at a possible a bullish turn on the horizon. For buy-and-hold investors and those saving for retirement in 401(k) plans, the Santa Claus rally does little to help or hurt them over the long term. It is a news headline happening on the periphery but not a reason to become more bullish or bearish during Santa Claus rallies or the January Effect. Declines large enough to qualify as bear markets often take place as a result of deteriorating fundamentals, whether the ultimate cause is a housing market crash, a pandemic, or merely a recession. Near the bear-market rally’s peak, market analysts including Bank of America equity strategists warned the relief gains were not in line with deteriorating investing fundamentals such as rising interest rates.

Worries over the possibility of a contested election dissipated following President-elect Donald Trump’s victory earlier this month, helping the S&P 500 climb to an all-time high. The Cboe Volatility Index, one measure of investor anxiety, closed near a post-election low of 14.10 on Tuesday. That said, getting too emotional in either direction is rarely beneficial for investors. The best approach is to stay disciplined—dollar-cost averaging into the market with your available cash flow and maintaining a long-term investment perspective. The Santa Claus Rally remains a fascinating and much-discussed phenomenon, underscoring the psychological and behavioral patterns that influence market movements. It serves as a reminder of how tradition and sentiment can drive investor behavior, even in sophisticated financial markets.

Recession? What recession?

I was a loyal solider at Credit Suisse for 11 years, shunning an opportunity in New York City at an upstart bank that offered me a two-year guarantee for much more money. The criticism is primarily that it only captures a small fraction of what is really happening in the market and tends to bring in new stocks only after they have hit their peak. With the surge in “Magnificent Seven” stocks, the average is even farther back than its market peers.