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Wells Fargo investment strategist Austin Pickle is adamant that the June 16 to August 16 equity rally was of the bear market variety, and that more selling and lower stock prices are ahead.

Mr. Pickle notes that there have been 12 bear markets in the post-World War II period. The S&P 500′s 24 per cent decline between January 3 and June 16 is mild enough to be indicative of a non-recessionary bear market. Wells Fargo, however, believes that a U.S. recession will begin this year and extend into 2023, providing one reason to expect weaker markets.

No bear market has occurred without a significant bear market rally. “These head fakes … can be substantial and enticing,” writes Mr. Pickle, “and are periods where other investors – betting that the majority of bad news is priced in – try to wrestle back control of markets.” These bullish investors are then overwhelmed by selling as new market lows are established.

With a 17.4 per cent gain, the 41-day June to August rally is only marginally above the average bear market rally of 15.5 per cent in 39 days. What we’ve seen, therefore, is a typical bear market rally, Mr. Pickle believes.

Hawkish noises from Fed chairman Jerome Powell on Friday sent stocks skittering lower and the aggressive Federal Reserve is one reason Wells Fargo believes the true market bottom is much lower. The potential for a sharp slowdown in earnings as the economy slows is another.

The strategist recommends using any market rallies to reduce exposure to small cap and ex-U.S. stocks. Sectors to reduce on rallies include consumer discretionary, industrials, financials and communication services.

Wells Fargo’s Mr. Pickle joins Morgan Stanley’s Michael Wilson and BofA Securities’ Savita Subramanian as equity strategists with confidently bearish views. The silver lining for investors is that aggregate strategist views have historically been contrarian indicators, and the more that bearishness becomes the consensus outlook, the more likely positive market outcomes become.

Also see: Aggressive Fed spurs worries over stock valuations

-- Scott Barlow, Globe and Mail market strategist

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