There are many definitions for both bull and bear markets. Some would argue the definitions are as simple as sustained time periods where markets are moving either up or down. The most accepted and quoted definition is when a broad index rises/falls over 20% from a subsequent 52-week low/high. Based on that definition, and after suffering a bear market decline of roughly -25% during 2022, the S&P 500 has officially entered back into a bull market as of June 9th with a gain of 20.04% off the October 2022 lows. So, everything is back to normal, and stocks are headed to new all-time highs, right? Well, not so fast.
The chart above shows two perspectives of the newly born bull market as of June 13, 2023. The green line shows the move off the October 2022 lows through June 13th. The red line shows the decline from the previous all-time high (Jan. 2022) to June 13th. So even with the strong move we have seen off the October lows, the S&P 500 is still down almost -10% from the previous highs. The current bull run is certainly a step in the right direction, but it is important to keep perspective when looking at return data over shorter time frames. This chart also illustrates the importance of reduced downside participation in bear markets, as a 25% decline (roughly what we experienced from Jan. 2022 to Oct. 2022) will require a 33.5% return to “get back to even.”
Why Do We Care?
While we can’t argue that the move from the October lows has crossed the unofficial bull market threshold, we can argue about some of the qualitative aspects of the current rally and what that might mean going forward. For starters, sustainable rallies usually have broad participation across styles and sectors. We saw that mostly through the beginning of the year, until the failure of Silicon Valley Bank. From that point, a large majority of the returns have been driven by only a few names. The chart below illustrates this point.
The separation of returns is very clear from approximately 3/23 on the chart and is somewhat unusual to see in a bull run. So why is this happening?
It is hard to know the exact reason this bifurcation is taking place but there are many theories as to what is causing it, and more importantly, how it will resolve itself. As it relates to the “Magnificent 7” listed above, several of these companies have been linked either directly or indirectly to the Artificial Intelligence theme that has gained popularity over the past several months. While these names are all solid companies that produce mountains of cash from their businesses, they aren’t immune to overvaluation. The tech bubble of the early 2000’s was centered around the idea that the internet was going to change the world. While that ultimately proved to be true, the short-term excess reached a level that was ultimately unsustainable. Will the early AI phase suffer a similar fate?
HCM remains in the economic slowdown camp, but we aren’t yet convinced that it has to be the type that leads to a full-blown recession. The economic data remains mixed, while the stock market is showing some significant technical strength. This bull market remains one of skepticism for many, but for now, it is a bull market nonetheless.
Weekly Focus – Think About It
“Failure is simply the opportunity to begin again, this time more intelligently.”
Performance last week for the four major asset classes were:
- U.S. Stocks – Russell 3000 (IWV) – Gain of 0.59%
- Developed Foreign Markets (EFA) – Gain of 0.27%
- Emerging Markets (EEM) – Gain of 1.6%
- Fixed Income (AGG) – Loss of -0.12%
(Note: performance is based on the change in price plus dividends)
Last Week’s Headlines
- The S&P 500 rose for the fourth week in a row, climbing to its highest level in nearly 10 months.
- Unemployment benefit applications increased to 261,000, up from 233,000 the previous week.
- Consumer Price Index (CPI) increased 0.1% monthly, with the annual increase reporting right on the expected increase of 4%, down from 4.9% in April.
Eye on the Week Ahead
- Retail sales, industrial production, business inventories, and University of Michigan Consumer Sentiment are set to be released at the end of the week.
If you have questions about the recent market conditions, please contact a member of HCM’s Wealth Advisory Team:
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