A Historic Rally
The S&P 500’s feverish late-year rally has brought the index to its highest level of 2023, leaving it just 4.2% away from the all-time peak reached in January 2022. A close above 4,796.56 on the S&P 500 would confirm that the index has been in a bull market since bottoming out on Oct. 12, 2022, by one commonly used definition. The benchmark index is up 19.7% for the year and has risen 28.5% from its October 2022 low.
Stronger Than Expected
The strength of the rally has taken many investors by surprise, as the Federal Reserve has been aggressively raising interest rates in an effort to combat inflation. However, the market has largely shrugged off these concerns, as investors have focused on the expectation that the Fed will be able to engineer a soft landing for the economy.
Shallow Bear Market
The bear market that began in January 2022 was relatively short and shallow, as the S&P 500 only fell by 25.4% at its lowest point. This makes it the fourth shallowest bear market since 1928. The bear market also lasted for just 282 calendar days, which is shorter than the average bear market length of 341 days.
Bull Markets Tend to Persist
History suggests that bull markets tend to feed off themselves, as strong stock performance pulls investors off the sidelines and boosts appetite for risk. Over the past 50 years, stocks have witnessed an average gain of nearly 260% during the six bull markets that have occurred.
A Pause May Be Ahead
Of course, stocks rarely rise in a straight line. Over the last 50 years, the S&P 500 has risen an average of 16% in the three-month period leading up to a bull market. By contrast, the S&P 500 has logged average gains of just 0.2% and 2.0%, in the one-month and three-month period after a bull market is confirmed.
Potential Risks
There are a number of factors that could slow the rally or hurt investor confidence in the coming months. These include:
- A recession in the United States
- A faster-than-expected slowdown in economic growth
- A further escalation of the war in Ukraine
- A sharp rise in interest rates
The Fed’s Balancing Act
The Federal Reserve is walking a tightrope as it tries to raise interest rates enough to cool inflation without slowing the economy too much. If the Fed raises rates too much, it could trigger a recession. However, if the Fed does not raise rates enough, inflation could continue to rise, which would also be harmful to the economy.
The Yield Curve
One key indicator that investors are watching is the yield curve. The yield curve is a graph that shows the interest rates that investors are demanding for Treasuries of different maturities. When the yield curve inverts, it means that short-term rates are higher than long-term rates. This is often seen as a sign of an impending recession.
Conclusion
The bull market is nearly loose, but there are still a number of risks that could derail the rally. Investors should be aware of these risks and be prepared to adjust their portfolios accordingly.
FAQ
A bull market is a period of sustained growth in the stock market, typically characterized by rising stock prices and investor optimism.
A bear market is a period of sustained decline in the stock market, typically characterized by falling stock prices and investor pessimism.
The S&P 500 is a stock market index that tracks the performance of 500 large companies listed on stock exchanges in the United States.
Inflation is the rate at which the general level of prices for goods and services is rising, and, consequently, the purchasing power of currency is falling.
The yield curve is a graph that shows the relationship between interest rates and the maturity dates of bonds.
A recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally characterized by a decline in real GDP in two consecutive quarters.
The Federal Reserve is the central bank of the United States. It is responsible for conducting the nation’s monetary policy, supervising and regulating financial institutions, and maintaining the stability of the financial system.
Economic growth is the increase in the production of goods and services in an economy over a period of time.
Risk appetite is the willingness of investors to take on risk in exchange for the potential for higher returns.
A market correction is a temporary decline in the stock market of 10% or more from its recent peak.
