Welcome to the 2023 bull market! It might be a bit surprising to read those words given all the doom and gloom portrayed in the media and overall sentiment of the economy and stock market. However, the S&P 500 officially moved 20% higher off its October 12th, 2022, low of 3,577.03. The 2023 bull market began on June 8th, 2023, with the S&P 500 closing at 4,293.93. By definition, a 20% move off the most recent low is a bull market, whereas a 20% move off a peak is defined as a bear market. The market has continued to move higher since June 8th and is now up 24.42% off those October lows.
The table below digs a bit deeper into each bull market cycle since 1962. The average bull market rises 195% and lasts 2,014 days or 5.5 years. Obviously, some bull market cycles are stronger than others or last longer than others. The table below highlights these historical bull cycles. The 1987 bull market lasted a whopping 4,494 days or over 12 years, while rising 582%. On the other hand, 2020 was the shortest cycle, lasting 651 days, or 1.75 years, while rising 74%. Note, the 1966 bull market was the weakest in percentage term, expanding 48%, despite lasting over 2 years.
Not everyone is embracing this bull market and there are those that look at the glass as half-empty versus half-full. Skeptics suggest that since we are still 7.22% below the January 2022 highs and are not truly in a bull market. I will re-direct you to the very first paragraph for the definition of bull/bear market cycles. And there is history to support that this has been the standard definition back to at least the 1970s, if not further. To stymie the skeptics, the S&P 500 would need to close above 4,796.56 to reach new all-time highs.
Do not rely on the press to help provide clarity of whether we have entered a new bull market cycle either:
The National Bureau of Economic Research (NBER) is the official government body responsible for notifying the general public know when the US economy has officially entered a recession. As of this writing, the last recession ended in April 2020, according to the NBER, and they have not notified us that are presently in the midst of one. This may be where some of the frustration lies for individual investors. On one hand, there is the NBER to sound the alarm when the US economy turns downward into a recession and subsequently provide the opposite message when the US economy enters back into an expansionary period. I won’t belabor the delay at which these notifications come, as I already wrote about that in my “3rd Quarter 2022 - Dr. Jekyll and Mr. Hyde: The Tale of Two Markets”. The cliff note version is that it takes between 4 and 21 months for the NBER to officially declare a recession. And by then, it could also be over already. The frustration to which I am referring is there is no governing body to provide similar guidance on the market, so we are left with history and the 20% boundary.
The Federal Reserve Open Market Committee (FOMC), which is chaired by Jerome Powell, has been at the center of much of this uncertainty as they continue to raise rates at a blistering pace. Greater uncertainty surrounds the next move by the FOMC at the July 25-26 meeting. Why? The FOMC paused rate hikes at the June 13-14 meeting for the first time since it began the current hiking cycle back on March 17, 2022. While it might seem like eons ago, the FOMC raised rates up from 0.00% - 0.25% at the first move of this tightening cycle. Today we stand at 5.00% - 5.25%. Rates have risen 5% in 14 months. The key question: is this the end?
The FOMC provides a quarterly release of their forward expectations for interest rates, it is termed the Dot Plot (see page 4 of the Summary of Economic Projections – June 14, 2023). The market also has futures contracts which allow traders to bet on future FOMC meetings. As of this writing, the July contract suggested an 84.3% chance of a 0.25% hike at the July meeting, with that being the final hike of this cycle. Those two data points are at odds and displayed below. The grey line is the historical moves of the FOMC as they have raised and lowered rates since 1999. The green line is where traders (vis-à-vis futures contracts) feel interest rates are headed. 5.30% represents one more 0.25% hike by the FOMC. On the other hand, the FOMC’s own Dot Plot suggests two more hikes with a peak at 5.60%. However, both suggest lower rates in 2024 with the FOMC’s data suggesting rates will be lowered four times by a total of 1% (4.60% blue diamond), while futures contracts point to five moves lower in 2024 (4.02% green diamond). The FOMC still believes rates will be back down to their long-term target of 2.50% in 2026 and beyond (purple diamond).
The FOMC has been on an aggressive path to hike interest rates in order to battle inflation. There are many facets of inflation, from wages to energy prices, to what the consumer experiences at the grocery store, etc. The table below highlights all of the ingredients that go into the Consumer Price Index (CPI). Focus on the color-coding, instead of the figures in each box. The green areas are indicative of inflation cooling whereas the closer an item is to the color red, the more inflationary it is (see summer and fall of 2022 for red hot inflation). There is a clear trend that all of the ingredients that make up CPI are moving lower, some are still sticky, but everything is far lower than it was during the peak in the summer of 2022 (look at all the green on the right side of the table!).
Even using the FOMC’s preferred measure of inflation, Personal Consumption Expenditures (PCE), it delivers the same information: inflation is coming down, but the pace at which it is moving lower has slowed:
The biggest fear for the stock market is that the FOMC will overdo it and push us into a recession. This was far more evident when the stock market troughed in October 2022. The news media only seemed to fan the flames:
Interestingly, the analysis of Google searches indicate there was greater concern about a recession well before the October 2022 pullback as the following chart of Google searches for “recession” peaked in mid-June and late-July. This also coincided with the S&P 500 entering bear market territory on June 13th, 2022, but searches now for the term have decreased precipitously:
As the market continues to move higher and data continues to indicate that inflation is cooling, although slower than forecasted, this provides a tailwind for the market. With 1st quarter corporate earnings now ‘in the books’ the data turned out to be, “better than feared”. The table below shows that while corporate earnings have not reached the same peaks as 2021, they were better than 4Q 2022 and fared better than Wall Street’s forecasts:
Positive earnings data combined with optimism that the FOMC may be done raising interest rates (or almost complete) are all attributable to the current market performance. And if the S&P 500 can push above 4,796, it may continue to suppress bearish rhetoric and skeptics.
One opportunity exists today, that has not been available to investors for more than 20 years; to invest in US Government obligations. While the chart below may look like rates were similar in 2007, the 3-month Treasury Bill reached a high of 5.28% on May 30, 2023. The last time it was higher was January 3, 2001:
In closing, beware of the shiny lure. Cash and short-term investments may make sense as part of an overall allocation, however the choice of all-in cash can be detrimental to long-term results. With the 3-month T-Bill at a 20+ year high, short-term investments are attractive, especially when uncertainty persists. But the S&P 500 has still provided a stronger long-term return, even if your investment timing is poor (the period below includes four bear markets):
If you have any questions or would like to discuss your personal circumstances, please do not hesitate to reach out to me.
Rob Leiphart, CFP®