When historians go back and examine this latest chapter in financial history, they will see that there were 3 phases to this bear market (so far).

The first phase was between February 2021 and January 2022. This is the case even though in February 2021, the world's major focus was on the coronavirus. But, the economy was doing much better than expected given the worst-case fears that percolated at the depths in March 2020. Additionally, many were becoming concerned that the economy's major challenge would be inflation rather than deflation which the Federal Reserve and federal government were aggressively trying to prevent.

As a result, yields on Treasuries shot up higher. Prior to this, they had been rising but at a very slow and steady pace. The broader market saw these developments as positive given that aggregate demand would be so strong due to stimulus. But, one part of the market became a victim of this development. Growth stocks were crushed, and there is no better example than the Ark Innovation ETF (ARKK  ).

The next phase was between January 2022 and May 2022. This phase was marked by an acceleration in inflation that proved wrong the Fed's 'transitory' descriptor. In response, the Fed got even more aggressive. We also had the shock of Russia invading Ukraine.

During the first phase, stocks were up despite pain in certain parts of the market, while bonds were down. Earnings also were great. In the second phase, earnings growth remained positive but at a much slower pace. Additionally, stocks joined bonds in moving lower.

Now, we are in the third phase which began around mid-May with the Fed hiking by 75 basis points and issuing forward guidance that was more hawkish than expected. So hawkish that it's causing inflation risk to dramatically decline, while recession risk soars.

It's easy to understand how hawkish the Fed is by looking at oil prices as the market believes demand destruction is likely given the impact of higher rates on economic growth. Additionally, cyclical stocks went from 52-week and all-time highs in many cases in mid-March to 6-month lows in many cases with losses accelerating following the June FOMC.

In fact, Fed funds futures are showing increasing chances of a rate cut in the first half of 2023. This is causing longer-term rates to bend lower. This means that investors should expect higher bonds and lower stocks during phase 3.