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Is This Bull Market A Sleeping Giant Or A Fierce Matador?

Is This Bull Market A Sleeping Giant Or A Fierce Matador?

June 8, 2023, marked a defining moment in the global financial markets. The S&P 500 index, often seen as a barometer for the US economy, closed at an impressive 4,293.93. This represented a surge of over 20% from its recent bottom at 3,577.03, set on October 12, 2022.1 Such a significant rise is indicative of the transition from a bear market, which began in January 2022, to a bullish phase that kicked off on October 13, 2022.1

Bull markets, periods characterized by a consistent climb in stock prices, usually have a longer lifespan and yield greater rewards than their bear counterparts. In the aftermath of World War II, bull markets have averaged a lifespan of five years and an accumulative gain of 177%. In contrast, bear markets have typically lost 33% over an average duration of one year.2 However, the current bull market is greeted with a sense of reservation rather than celebration by investors. Its future path remains ambiguous — will it continue to surge ahead or make an about-face?

Barely Scratching The Surface

One of the factors feeding this skepticism is the index's failure to reach its previous peak, set in January 2022. As of late June, investors holding positions in the broader market have been left staring at their paper losses. Turning these into real losses by selling could stir the pot of uncertainty, potentially putting a damper on the typical confidence that fuels extended rallies.3

Eight months into the current bull market, the time needed to recoup the bear loss of around 25% remains uncertain. History paints a mixed picture. The bull market that followed the pandemic-induced bear phase managed to recover a 34% loss in five months and ultimately saw a cumulative gain of 114%. Conversely, the post-Great Recession bull market took over four years to bounce back from a 57% decline but eventually charged to an impressive 400% gain.4–5

Some investors wonder if the recent surge is simply a bear market rally, a temporary uplift before a slump back into bear territory. History again provides contrasting insights. Bear market phases in 2000–2002 and 2007–2009 featured such deceptive rallies. Yet, in 12 other "bear exits" since World War II, a rise of 20% from the recent lows marked the onset of robust bull markets.6

A Rally On a Narrow Path

What is also disconcerting for some is the current rally's reliance on a select few — large technology companies. These tech behemoths, fueled partly by the anticipations surrounding the future of artificial intelligence, have logged considerable gains.7 In the S&P 500 index, the value of these giants holds significant sway due to the index's market-cap-weighted nature. By May 31, the top ten companies, eight of them being tech entities, accounted for over 30% of the index value.8 The market rally of 2023 has witnessed less than a quarter of S&P 500 stocks beating the index, and about half have depreciated in value. Although not unprecedented, this rally's narrowness is cause for concern and leaves open the question of whether the rest of the market will catch up with the tech enthusiasm.9–10

The Dance Between The Market and The Economy

The stock market, while seemingly possessing a will of its own, is ultimately tethered to the larger economy. Here too, mixed signals are being emitted. The long-anticipated recession hasn't shown up, and consumer spending and job markets remain resilient.11 Yet, inflation rates, albeit on a downward trend, are still beyond what is considered healthy for an economy. The Fed halted its rate hikes in June, contributing to the market rally, but two more hikes are on the cards by year-end, as confirmed by Fed Chair Jerome Powell in a Congressional testimony on June 21.12

Higher interest rates, a tool to control the economy and inflation, could restrict consumer and business borrowing, slowing spending and business growth, potentially tipping the economy into a recession. Paradoxically, bull markets usually arise during a recession; the market bottoms out when the economy is down and then recovers in tandem with the economy. Traditionally, a bull market sets in when the Fed is cutting rates to stimulate the economy, not raising them to slow it down.13 The current bull market will need to defy these trends to sustain its momentum. And if a recession does unfold, it could turn the bull into a bear.

A Peek Into Recent Market Cycles

The pandemic put an end to the second-longest bull market in U.S. history, which lasted from March 2009 to February 2020. After a short bear phase, a new bull market sprang up in March 2020 and ended in January 2022. The latest bull cycle began in October 2022.

S&P 500 Index History

The S&P 500 has seen a rollercoaster of highs and lows over the past few years. It reached a bull peak of about 3,500 on February 19, 2020, a bear low of about 2,100 on March 23, 2020, a bull peak of about 4,700 on January 3, 2023, a bear low of about 3,500 on October 12, 2022, and the start of a new bull market at around 4,300 on October 13, 2022.

The Elephant In The Room: Corporate Earnings

Despite investor sentiment playing a crucial role, corporate earnings remain the bedrock of market performance. The earnings picture, too, is currently divided. Q1 2023 saw a 2% decline in earnings, though less severe than analysts predicted. However, this was the second consecutive quarter of earnings drop, with an expected 6.4% decrease in Q2, the largest since the pandemic wreaked havoc in Q2 2020. Yet, earnings growth is projected to make a comeback in the latter half of the year, with an anticipated robust growth of 8.2% in Q4, largely driven by large technology companies.14

Indeed, the bull market of today faces considerable challenges. Its true nature might take some time to unveil. While market cycles hold significance, it is essential to refrain from drastic reactions to short-term shifts and to focus on long-term investment strategies that align with personal goals, time frames, and risk tolerance.



Investments in stocks are subject to market fluctuations. The value of shares may rise or fall, and when sold, they may be worth more or less than their original cost. The S&P 500 index, an unmanaged collection of securities, is often used to represent the U.S. stock market as a whole. An individual cannot invest directly in an index, and its performance does not reflect the performance of any particular investment. Past performance does not assure future results. Actual results will vary. Forecasts are based on current conditions and are subject to change without notice, and they may not come to pass.

1, 3–4, 8) S&P Dow Jones Indices, 2023 2, 5) Yardeni Research, October 28, 2022

  1. MarketWatch, June 8, 2023 7, 9) CNN, June 9, 2023