2023 started in bearish territories. Indeed, the major indexes of the stock market were nearly 20% down. Today, it seems to be the opposite. The U.S. stock market is up about 20%. This is an indication that we are in bull market territories, but does it mean that we are officially in a bull market?
At 248 trading days, the recent run back to a bull market was the longest bear run for the S&P since 1948. The resilient rise of the benchmark index came amid the most aggressive Federal Reserve rate hike campaign in four decades, regional banking turmoil, and incessant recession worries that haven’t fully materialized.
Stock Market Indexes
Source: Yahoo Finance
Research from Bank of America indicates the S&P 500 rises 92% of the time in the 12 months following the start of a bull market, compared to the historical 75% average over any 12-month period dating back to the 1950s. Savita Subramanian and the equity team at Bank of America Global Research wrote:
“We are back in bull territory, which might be part of what it takes to get investors enthusiastic about equities again. If investors feel pain in bonds, via lower returns or negative opportunity costs—likely if real rates rise from—they should be incentivized to return to equities, especially equities that benefit from rising real rates (cyclicals).”
The AI boom has fueled interest in tech stocks, which dominates the S&P 500. After a horrible year for Big Tech, optimism has returned as ChatGPT has made AI the it-thing in Silicon. Valley. Investors are placing big bets on Google, Meta, Apple, Amazon, Nvidia, and others, hoping they can drive a new tech revolution with artificial intelligence.
Over the past week, markets have gained momentum, likely because of the end of the debt ceiling crisis, optimism that the Federal Reserve will pause rate hikes at its June meeting, and a recent string of strong economic readings.
History shows the average path up for stock might not be linear. Ryan Detrick, Chief Market Strategist at Carson Group, tracked 13 times stocks bounced up 20% off a 52-week low since 1952. In the first three months, stocks were usually choppy, with the benchmark index actually falling 0.5% on average in the first month upon hitting market territory.
Since the Fed began announcing changes in the Fed funds rate in 1989, Sam Stovall, the chief investment strategist at CFRA said that there have been 16 times during rate hike cycles when the Fed either skipped raising rates or ended its rate-hiking program altogether. After the Federal Reserve either skipped or stopped hiking rates at one meeting, the S&P 500 rose an average of 3.6% and gained in price 88% of the time. Does it mean then that everything is fine?
Not necessarily. The reality is that it might be too early to claim that we are “officially” in a bull market. Indeed, the Federal Reserve is likely not done hiking interest rates. Even if the central bank holds rates steady at its next meeting, which would be the first time that’s happened in more than a year, the expectation among traders is for the Federal Reserve to resume hiking in July. The hope is that this will ultimately be the last rate hike, but persistent inflation could upend that. That keeps the pressure on the overall economy and particularly on the banking and manufacturing industries, which have already shown some cracks.