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Up and up. So what's next?

Up and up. So what's next?

February 08, 2024

The S&P has been hitting all-time highs... again. It's now safe to say that the bear market is over for now. 

The S&P has clawed back to its post-covid peak, which is even higher than the 2019 run-up. Once the S&P 500 hit the high, it inched higher a few more times after that.1

That means it has passed the final bar to formalize the bull market in stocks that started after the October 2022 market low.2

What even is a "bull market" or "bear market"? 🐂🐻

In common finance language, a “bull market” is a handy nickname for a period of rising markets, though there is no official designation. 🐂

Typically we consider stocks in a bull market when prices rise by 20% from the prior bottom. Some analysts say that the 20% rise has to be higher than the most previous market highs, but not everyone keeps to that view.

In the same step a "bear market" is, you guessed it, a 20% drop. 🐻

It's hard to always come to a consensus because there is no one authority that official who calls a bull market or bear market. It's not like Jerome Powell, the president of  the S&P 500, or the official Tick Tock influencer gets to make that announcement for everyone. 

How can you keep the bull market or bear market straight? I don't know how true it is, but someone once told me that we call it a bull market because bull attack up, and a bear market because bears strike down. That might just a fable, but it helps me keep the animal kingdom straight. 

It can get a bit confusing since sometimes we're in a bull market but don't "officially" call it until later.

But it's officially a bull market. 🥳 🥳 🥳


Does this mean all stocks and investments are on the rise?

Well...no. An index like the S&P 500 represents just a portion of the stock market and is useful for tracking trends over time. The S&P is comprised of large companies domiciled in the US. It does not include the small companies of the US or any of the companies in every other country in the world. In addition, the S&P is only stocks, and does not include the market for bonds, real estate, or the market for baseball trading cards.

As we have discussed before, how stocks perform is based on the expected future cash flows and expected returns of a company. The performance of any individual stock is affected by reported earnings and the expectations of investors based on many factors that may not apply to the overall market.

So, from here are stocks going up or down?

We can look at the history of bull markets to find trends. We look at past bull markets we see a tendency that markets continue to rise.

In the last two bull markets (from 2009-2020 and 2020-2022) the upswing period lasted 132 months and 21 months, respectively.3

But that's just a sample. Caution should be taken. As you have seen on practically any investment report, "past performance is not indicative of future results". Just because an object in motion tends to stay in motion, doesn't mean we will see an outside force stop the motion.

Bear markets happen. A lot, but not as often as bull markets. 

Though we can generally stay positive, and be optimistic about markets, there are a lot of factors that can change investors' moods. There are concerns of sticky and lingering inflation, interest rate changes, and a concern that the economy can have a hiccup and cause a drag on our IRAs and 401k's.4

Check out the attached chart of the S&P 500. 

This chart looks at year-to-year performance. You can see the positive years and negative years.

As an added benefit, we're even including the intra-year dips; the lowest trading day throughout the year.

(Take a look at the red circles to see the market drops each year.)

But what does this mean? 

My biggest takeaway is that by viewing the performance of the S&P this century we see more positive years than negative years. 

You could point out that 16 of the last 24 years, 2/3 of the time, there was at least a 10% drop in the S&P. But just look at the whole chart! In the best years of performance, you have some deep negative intra-year drops.5

The way I see it, if you chose to be out of the market because of the inevitable declines, you would have missed out on all of the benefits. 😲


There are reasons to be positive for 2024

First, US grew last year.... I remember when everyone I spoke with thought there was going to be a recession. I even thought there would be a mild recession. But did we pull out of all our investments? Of course not!

In reality, the US economy grew way faster than everyone expected. The U.S. economy grew 3.3% (annualized) in the fourth quarter—much higher than the 2% expected—though still slowing from 4.9% growth in Q3.6

Americans are still spending money, which is one good way to continue growing the economy.

The Personal Consumption Expenditures (PCE) index shows inflation rose just 2.7% in 2023 overall, down from 5.9% a year ago. That’s a significant decrease in overall inflation.6

Taken together, that means the economy is still growing while inflation continues to moderate, which is exactly what economists hoped would happen.

Bottom line: we're going to plan on staying invested, but in a plan that can weather a recession. If you have not done so, now is a good time to check in on your cash reserve levels, stress test your portfolio, and update your long-term financial plan.

Feel free to contact our office if you want to discuss more on how the market bulls and bears affect your retirement plan.


Sources:

1. https://www.reuters.com/markets/us/futures-stall-ahead-economic-data-tesla-slides-growth-warning-2024-01-25/

2. https://www.nytimes.com/2024/01/19/business/stocks-bull-market.html

3. https://www.forbes.com/advisor/investing/bull-market-history/

4. https://www.morganstanley.com/ideas/are-we-in-a-bull-market-2024

5. https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf

6. https://www.cnbc.com/2024/01/24/stock-market-today-live-updates.html

Chart source: https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf


Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.
The S&P 500 is an unmanaged composite index considered to be representative of the U.S. stock market in general. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. For illustrative purposes only