The bear market of 2022 started in classic fashion. Equities had rallied far ahead of earnings expectations and were overvalued by more than 50% by our measure at the end of 2021.
Rising inflation and worries about a more hawkish Fed set off a violent rotation out of growth stocks and into value in January 2022. Further adverse events followed. Russia invaded Ukraine, sending energy and food prices (and inflation) soaring. China responded to rising Covid infections by locking down large swathes of its economy. This contributed to shortages and supply chain woes that further stoked inflation. The Fed started raising rates. The yield curve steepened sharply, pushing mortgage rates to over 5% and threatening to bring housing to a standstill.
Come mid-June, the SPX entered bear market territory a little more than five months after posting a new high. When it hit the low of 3667 on 17 June, that brought it back in line with the earnings trend. Since then, it has traded in a range near fair value.