Is a bear market coming?

Major indices have staged a remarkable comeback in the past 10 days and recovered most losses since Apr 2. However, whether or not this rally will continue as per normal into a bull market depends on several factors. It is difficult to know whether you're in a bear until you see one / strong signs of lower highs and lower lows, but by that time, it will be too late. Nobody would know for sure and it's always in hindsight that you will realise this is a bull or bear. Even in a bear, there will be strong rallies like this one, example in 2022, where the market is whipsawing while trending downwards. 

Motivation behind this trade situation

To understand where the economy and market is heading, let's examine the movitation behind the current trade situation. I think their main objectives are (1) reshore manufacturing of critical products so as to reduce reliance on foreign countries. (2) bring some jobs back for the lower-income groups (3) encircle/isolate the second largest economy. (1) is especially important as they are currently overly reliant on foreign imports for critical materials and goods.  There are many articles talking about (1).  (3) is just repeating the playbook for how they successfully isolated that "well-known" country during the first cold war which led to its collapse. Now they are partnering with the largest populated country to counter the second largest economy.  Overall, this is a very dire and serious situation for them, as (1) and (3) concern their survival. There are also secondary objectives like increasing their exports to boost GDP and to reinforce their current dominant position in the global economy, thus ensuring their continuous relevancy. With this context in mind, it is likely that they won't give up so easily, that is, this trade situation will last for several months at least, although there might be some de-escalation which may not come soon enough to fend off any economic fallout. 

Any deals soon?

There have been a lot of news regarding talks, etc. Also Australia and Canada have just concluded elections recently and their new leaders are not so friendly towards "them". Hence it is likely talks with these countries will take time and possibly met with obstacles. Even traditional friends like Japan and South Korea are expecting a deal only until July, and there are still hurdles to be ironed out. So deals may not come so soon in the next few weeks, except for India which could be one of the first to sign. Overall I don't think there is much incentive for these countries to conclude a deal so quickly before July. 

Economic data

The April jobs report was released in May and appeared better than expected. Of note, the "nonfarm payroll" of 177k was better than the expected 130k. I'd take this with a pinch of salt as this number is based on surveys which could be inaccurate. In fact, the numbers for previous months have been revised downwards subsequently after being released.  From GPT:

Nonfarm payroll data is a valuable economic indicator, but it does undergo revisions that can sometimes be significant. The Bureau of Labor Statistics (BLS) releases initial estimates based on survey data, which are later adjusted as more comprehensive information becomes available. These revisions can reflect seasonal adjustments, updated employer reports, or benchmarking against more complete datasets

Look at the actual data: https://www.bls.gov/web/empsit/cesnaicsrev.htm

Anyways, data for Jan - Apr are backwards looking and largely untainted by the trade situation. There is also distortion due to front-running by stockpiling. Going forward, experts have forecasted higher prices/inflation, supply chain disruptions, shortages and even mass layoffs due to slowing trade between the 2 largest economies. I think the full impact will be felt during the next 2 months. Such a scenario will be tricky for Fed to cut rates.  If inflation goes up but labor is still OK, the Fed may not cut rates. 

De-escalation

Time is of essence here to minimise ecnomic damage. I think the longer  this drags, the bigger the damage. Previously, Walmart, Target and Home Depot have sought reliefs but did not get any. There are some exemptions already but going forward, I don't think either side will de-escalate (in a meaningful way) unilaterally without any mutual agreement/deal, as neither side wants to be seen as "weak", and they are determined to achieve the aforementioned objectives. I think both sides will need to talk for at least a few weeks before any mutual de-escalation happens. Any comprehensive/serious talk will take several months at least. One side wants to exert max pressure and would not lower voluntarily unless there is some serious situation (example, bond markets, economy crash). Even if there is de-escalation, how much lower can it go to? 50%? 100%? 100%  is still very high and may not reverse any damage. 50% would likely increase inflation and drive lower growth without causing a recession. 

Conclusion

Since the current rally is based on (1) hopes of de-escalation (2) backward-looking economic data and earnings, going forward, without any meaningful de-escalation / rate cuts, the market may likely drop as new economic data worsens over the next several weeks.  The speed and magnitude of de-escalation are both important in determining the extent of future damage. Also, given how furious this rally ocurred, it will need continuous positive catalysts to sustain, otherwise it's likely the current positive sentiment gradually wanes off. Further, deals and de-escalation are unlikely to materialise so soon to support the sentiment. 

Various outcomes are possible: outright recession, high inflation with low growth, etc. I can't imagine any positive outcome, unless the trade situation is entirely resolved, which itself is unlikely. Whether the market has truly bottomed depends on how the trade situation evolves.