Many are declaring the bear over, but a new bull market is more a process than a single moment
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Bull markets are defined and embraced only with a lag, the way the cultural period we call the ’60s began only with the release of “Blowin’ in the Wind” and assassination of JFK in 1963. Or how the ’80s, as popularly recalled, didn’t truly get rolling until “Fast Times at Ridgemont High” hit theaters on the same Friday in August 1982 that the generational 18-year stock-market rally lifted off. And so, when Bank of America and Bespoke Investment Group and others last week declared a new bull market underway after the S & P 500 met the most simplistic standard by closing up 20% from its October bear-market low, it was simply a momentary touchstone for a series of shifts underway for a while. The conditions were set with a climactic-seeming washout into the October trough, just as inflation peaked, fear crested and seasonal factors turned favorable. Here’s what I had to say about it at the time. A fourth-quarter rally paused in mid-December only to rev up into January, when a series of rare momentum and breadth indicators were triggered and the most mistreated stocks of 2022 roared back to life. Around that time – without asserting all was well – I wrote about ” The bold bullish case to be made for U.S. stocks — one that not many are voicing just yet .” Several weeks later, after the market briefly panicked over the regional-banking mini-crisis, the S & P 500 finished the first quarter by surpassing the up-sloping 50- and 200-day moving averages — something it did not manage to do during last summer’s 19% rebound to the current level near 4300. The index has stayed comfortably above those trend lines since (indeed it’s now stretched a bit far above them, at the moment, in a short-term overbought condition). And while the advance last few months has been roundly heckled for its over-reliance on a half-dozen huge, expensive growth stocks, that never seemed from here a fatal weakness . And in any case this month there has been some encouraging partial broadening of the strength, with the equal-weight S & P outperforming the standard index by a percentage point so far in June. This is in no way intended as a claim of credit for having called the market recovery. Every step of the way each market assessment cited the ambiguity of conditions, the risks of failure, the still-flashing leading indicators of recession, the takes laced with more nuance than conviction. The review is merely to note that the beginning of a potential bull market is a process, not a moment, occurring as the weight of the evidence gradually shifts in favor of the optimists. So where does that leave us? As BofA details in its report Friday pronouncing the bear market “officially over,” since the 1950s, “after crossing the +20% mark from the bottom, the S & P 500 continued to rise over the next 12 months 92% of the time.” A pretty good signal the worst is passed, then but not a foolproof one. The huge post-9/11 rally in 2001 was a vicious head fake, giving way to a slide to new lower lows over most of the next year. The post-Lehman Brothers ramp also reversed lower in a hurry in 2008-2009. Painful exceptions to an otherwise pretty encouraging rule. A new bull market, even if in place, doesn’t always mean a timely sprint to hefty further gains. The forward returns once the S & P has posted the initial 20% rise are no better than average over the subsequent three months, according to Bespoke Investment Group, though over a 12-month span they are decidedly superior to a typical annual return. The 20% threshold was surpassed last week just as some indicators of investor attitudes flipped toward clear optimism from stubborn caution. The weekly American Association of Individual Investor survey saw the largest jump in bullish respondents since the November 2020 week when favorable Covid vaccine results were released. Interestingly, that was eight months after a major market low (same spot we are now). The market went steadily higher for the following year, though arguably with a lot more help from policy stimulus than is on offer today. For what it’s worth, BofA technical strategist Stephen Suttmeier says, “Since AAII is well below complacency levels, sentiment suggests FOMO [fear of missing out] with room to run to complacency.” The 45% bullish reading last week can only be viewed along with the market context. In a bear market, that’s toppy; while in a bull market backdrop, such a level of optimism is fairly routine. Sort of how a 75-degree day in New York in January is jarringly warm and sure to revert lower soon, in June that temperature is perfectly mild and unremarkable. Same story with the CBOE Volatility Index (VIX) , which closed under 14 last week. This reflects a lot – the relative calm in the S & P 500 itself, the offsetting push-pull of diverging stocks within the market, the passage of key potential stress events (debt ceiling) and weak demand for hedging eight months off a market low. In a bear market, 14 is “too low,” In a bull market, it’s middling. Bull headwinds ahead None of this clinches the deal for a new durable uptrend underway. The economy has been resilient but is slowing in many areas, with a jump in weekly unemployment claims demanding notice. It’s tough to see how, even in a stable tape and mild-growth economy, Wall Street can entirely escape the “late-cycle” recession vigil. The Federal Reserve’s “higher for longer” message on rates has been digestible for now but remains to be seen if it stays that way. And there’s no denying that even if this is a bull market, it’s a rather underachieving one to start both in magnitude of gains and breadth of participation. I’ve wondered here repeatedly whether the relative mildness of the bear-market reset – if it’s over – simply means future equity returns won’t be as generous as they’ve been after most severe downturns. And near-term, as noted, the market is a bit stretched, up at a likely resistance zone, with a CPI report, a Fed decision, a sometimes-turbulent June options expiration and weakening seasonal tailwinds to contend with in the coming week. With all this in play, there’s not much risk that the sturdy and helpful wall of worry will crumble all that quickly. For now, though, there’s a big-picture glass-half-full take right in front of us. The S & P 500 has built a cushion with which to absorb routine pullbacks without jeopardizing the broader trend. The index is exactly where it was two years ago even as nominal U.S. GDP 15% higher. Year-ahead earnings forecasts have been rising since February. The AI frenzy generates a level of excitement over an open-ended growth theme that bull markets need, even if ultimately it proves overdone. And unlike in 2022, the rules “Don’t fight the Fed, don’t fight the tape” no longer seem clearly to favor the bears, with the Fed likely near its destination and the tape improving.
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