Published June 30, 2023
In a recent article we posited that the bear market was over. One of the reasons we say this is captured below in a series of charts. We will conclude with a Goldman Sachs outlook that is muted. But muted is not bearish. Things have changed in the market and investors have, in many cases, been caught off-guard as they typically are. Here are some things we note:
If the bear market that began sometime in late-2021/early 2022 is still going on, it will be the best-performing bear market we have ever experienced. We will be in the midst of a rip-snorting bear market rally. We now doubt that is the case. Instead, we think normal investing has returned and this rally off the bottom is the beginning of that normalcy.
Here are a couple of charts from Blake Millard’s “Sandbox” blog displaying where we have recently been:
The strongest bear market in history?
This is one of the most unloved bull markets I can recall. People say the rally is too narrow, or trading volume has been weak, or even that investor sentiment remains feeble. If this is still a bear market rally, it will end up being the longest bear market rally in history by measurement of time.
And it will also be the most substantial bear market rally in percentage terms. Below the chart shows the retracement of the market from its low point. The current rally has gone further upward than any other bear market in history. Easier to conclude that the bear market is no more, we think.
Further, while the stock market rally was kickstarted by the big megacap tech stocks – now often referred to as a “Super 7” – the rally has been expanded, as is usual in a new bullish market phase. Below is a chart of the market’s breadth shown approaching record highs – hardly a bearish sign.
Fueling this uptrend has been a return to the “buy the dip” mentality. The chart below shows the average market move the day after a down day. The rising bars denote investors stepping in to buy the dip in price rather than looking at the down day as a signal to further sell. The buy the dip mentality is particularly strong this year as investors see a chance to get into a new bullish phase at lower market prices.
But what about the fact that small and midcap stocks have largely not participated in the market rally? While that is true, there are signs that is changing. See below that an index of industrial stocks, equally weighted, has been consistently outperforming the broad market. This is likely due to the government’s infrastructure spending bill. But it is also a sign that cyclical stocks are back in vogue. We think it’s only a matter of time before the buying spreads to other small and midcap areas.
The holdup, we think, is two-fold: 1) groups that are hurt by rising interest rates (e.g. high dividend payers like banks, energy and healthcare) and 2) the short-lived bank crisis earlier this year. Financial stocks have become mostly “dead money” after that crisis. Healthcare stocks have gone nowhere as rising interest rates have made the high-dividend payers less attractive and biotech remains off the radar for most investors.
Finally, we offer the latest view from Goldman Sachs. Note that their 2023-end projection for the S&P 500 is another +3% above current levels (so UP not down). Followed by a very modest rise in 2024 as the new bull market digests the first round of gains. So, despite their reasons for caution, they are not expecting the market to fall, merely for it to be “normal” with lots of sideways trading. Here’s what Goldman sees:
The bottom line is that investors have increasingly come out from under their shells and slowly but consistently been embracing the end of the 2022 bear market. The above, taken together, suggests that this is likely the first blush of a new bullish phase in the market, one that will have usual pullbacks, but generally push upward. Consistent with this view, the VIX volatility index has collapsed back to its typical bull market reading of 10-15.
Stock indexes began the week with a -0.4% dip as a regional report from the Dallas Fed disappointed. But strong economic reports Tuesday overcame the Monday dip with a flurry of buying. The S&P 500 gained +1.1% on the third straight monthly rise in durable goods and a 17-month high reading in consumer confidence. Wednesday was essentially unchanged while Fed Chairman Powell opined that Fed policy had not been restrictive “for very long”. But investors have become somewhat immune to the Fed’s inflation-fighting rhetoric as they see the end of the Fed’s rate-hike cycle on the horizon. Or, they have come to believe that further increases in interest rates will be accompanied by strength in the economy. An upward revision in first quarter GDP combined with a positive outcome from a recent bank stress test to propel cyclical and financial stocks higher Thursday. The S&P 500 lifted by +0.4%. Strong consumer spending and moderating prices gave investors a positive push Friday. The S&P 500 zipped higher by 1.2% while shares of Apple continued their climb pushing the company above a $3 Trillion valuation, the highest in market history. Friday closed a month of June that saw all eleven market sectors sport gains, a clear broadening out of the market’s move upward.
Strong economic reports fueled a solid week of gains for stocks. The S&P 500 (SPY) rose +2.32% while the Nasdaq 100 (QQQ) gained +1.90%. Smallcap stocks (IWM) rallied +3.71%.
Warm wishes and until next week.