The chart below shows that the S&P 500 and Nasdaq 100 are up over 20% since the lows from October. For many investors, that’s the definition of a new bull market, but it’s not like flipping a switch. There are several other factors to consider, so let’s dig deeper to see if this really is a new bull market for stocks.
First, the bad news. The economy continues to soften, and a recession could be on the horizon. The Federal Reserve is signaling no plans to cut interest rates anytime soon, and retailers like Costco and Walmart have confirmed that inflation is changing spending habits for several Americans1.
The gains in both indices have also been mostly attributed to big tech. As of June 2nd, the average individual stock in the S&P 500 had risen less than 3% this year, compared with a gain of over 11% for the index as a whole. Around 90% of the rise was attributed to seven large companies: Amazon, Apple, Meta, Microsoft, Nvidia, Tesla, and Alphabet (Google)2.
These companies are also ideally positioned to benefit from the artificial intelligence (AI) hype currently underway. Hence, by extension, much of the rally may be a byproduct of another bubble forming.
Furthermore, a $10 stock that falls to $5 and then trades back up to $6 doesn’t imply everything is on the mend. That stock is still down 40%. That’s why some investors view the start of a bull market as when an index sets a new high after rising from a bear-market low. By this measure, the S&P 500 is still over 11% short3.
Lastly, pile on dysfunction in D.C. and geopolitical risks, and there’s a “wall of worry” that could remain an impediment to stocks finding a more solid footing.
Now, let’s consider the good news. While the economy is undoubtedly slowing, it’s not crashing, nor is a recession a sure thing. Unemployment remains near all-time lows, and the number of job openings exceeds 10 million(roughly 1.8 jobs currently exist for every person looking)4. It’s hard to say a recession is imminent when employers are this desperate for help.
Not all spending is down, either. Airfares have doubled from last summer, yet Delta reported they were already over 75% booked for the summer back in mid-April5. Higher-end retailers like Lululemon, the purveyor of overpriced workout clothes, recently reported strong earnings and forward guidance. Add it all up, and some companies are feeling the pain of a slowing economy while others seem to be just fine.
Those same retailers warning of consumer spending shifts are also telling us that inflation is moderating, and prices are even starting to fall for some key consumer staples1. Commodities across the board are down dramatically from last year, and while the Fed may not be cutting interest rates anytime soon, they don’t seem to want to raise them much higher either.
Maybe that’s why good news may once again be perceived as good. Last Friday, a key jobs report exceeded even the most bullish forecasts. Until recently, news like that would have caused the stock market to sell off because it would have given the Fed more fuel to raise rates higher.
Instead, most major indices surged higher, especially the Russell 2000, which had been lagging the S&P 500 all year. This is an index of smaller companies that generate most of their revenue in the U.S. Over the four trading days since the jobs report, the index has exploded 6.8% higher. When good news gets treated like good news, it tends to be a bullish sign.
Sectors other than tech also led the charge. Perhaps the breadth of gains is widening, and if so, it could only strengthen the foundation of what could be the early innings of a new bull market. Stocks tend to anticipate the economy by 6-9 months, so this could be a reflection that investors have already priced the bad stuff in and are now looking to the eventual recovery.
Lastly, while it may seem like there are a lot of geopolitical risks out there, the sad reality is that there are always countless risks. But even as economies fail, terrorists attack, and wars wage, the stock market has weathered it all so far. There’s no reason to think that this time will be any different.
The bottom line
Let’s assume for a minute that this is a bull market. What changes? Are stocks suddenly less risky? Can we breathe a collective sigh of relief knowing that the coast is now clear? I’m not so sure.
Bull market or not, there will still be bumps along the way. Two out of every three years since 1928 have experienced a peak-to-trough drawdown of 10% or worse. In close to 95% of all years, there is a drawdown of 5% or worse6.
But that’s ok because drawdowns represent opportunity. They are an indication that there are still bears lurking out there, and the bulls need bears in a market, or else they have no one to profit from.
Furthermore, the early innings of recovery tend to be some of the most profitable and important to achieving long-term goals. If we’re in them right now, occasional bumps may be worth it in the long run.
Regarding investment strategy, we’ve been positioning for a rebound in stocks for months and see no reason to deviate simply because an index of 503 large-cap stocks is up over 20%. Long-term drivers of stock prices, like corporate profits, just don’t work like that.
The bottom line is that a new bull market may sound comforting, but it’s unlikely to change much to a properly diversified financial plan that relies on more than just stocks to achieve financial goals.
2 Bloomberg. As of 6/2/2023
3 Bloomberg. As of 6/8/2023
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.