Was Today the End of the Bear Market in Stocks?

Stock markets surged higher in one of the best days in history, with the biggest-ever point-based gain for the Nasdaq Composite (^IXIC 2.02%). Rises in the Dow Jones Industrial Average (^DJI 0.40%) and S&P 500 (^GSPC 1.02%) also made their respective top-10 lists.

Data source: Yahoo! Finance.

The catalyst for the explosive move higher in stocks was the latest reading on the Consumer Price Index, which signaled a potential slowdown in inflation rates. That, in turn, led investors to conclude that the Federal Reserve might slow the pace of its monetary-policy tightening, with potential ripple effects supporting the broader global economy and reducing the odds of a recession in the immediate future.

That argument was compelling enough to give markets a much-needed short-term boost. But does it mean that when you look back at this day years from now, you'll see it as the unofficial end of the bear market? Here are some thoughts both in favor and against that view.

Image source: Getty Images.

Sentiment was due for a shift

One argument favoring the idea that today could mark at least the beginning of the end of the bear market is that the move came after investor sentiment had improved at least a bit from its worst levels in recent months. In late September, as stock indexes hit new lows for the year yet again, more than 60% of individual investors were bearish on the market, according to data from the American Association of Individual Investors.

That marked the first time since the 2009 financial crisis that so many investors were bearish on the market. The fact that those 60%+ readings came for two weeks in a row truly showed how one-sided the prevailing popular opinion of the market's prospects had become.

With so much negativity already baked into the market, even the slightest indication of potentially better times ahead was enough to spark a flood of buying interest. Even with October's gains, bullish sentiment remained at around 25% as of Nov. 9, so the positive news on inflation had the ability to change a lot of investors' minds about what the immediate future could bring.

Just another bear market rally?

Many analysts remain skeptical about today's big jump. Even if the worst inflationary pressures are subsiding, the bearish argument goes, there's still a hefty economic headwind to overcome in the months ahead. Even the Fed itself has acknowledged that the potential to engineer a soft landing for the economy has diminished recently. If that filters through to reduce corporate earnings, it could provide another downward push on stock prices.

Moreover, the big rally in the bond market that pushed long-term interest rates down only exacerbated the current inversion in the yield curve. Even as 10-year Treasury yields moved down almost a third of a percentage point to just above 3.8%, three-month yields stayed steady at 4.17%.

Much will depend on whether inflation quickly moves back down to around 3% or stays at more elevated levels for a longer period of time. Bullish investors tend to point toward disinflationary trends in certain areas of the economy, while bearish market participants note some items in which inflation has proven to be stickier and harder to reverse.

Just keep investing

The nice thing about being a long-term investor is that you don't have to worry much about whether to be in or out of the market during turbulent times. A consistent strategy of staying invested and making incremental purchases can serve you well, regardless of whether today proves to be the end of the bear market or just another head fake.