It Might Look Like A Bull, But It Still Feels Like A Bear

With a 20% rise from the lows in the bag, US stocks are back in a “bull market” – but some investors are worried that running with this bull could get you the horns.

🕰 Recap

• In June 2022, the S&P 500 dropped 20% from its most recent peak – officially falling into a “bear market”.
• The S&P 500 is up almost 15% so far this year – all of which has been driven by investors’ excitement around artificial intelligence, according to Société Générale.
• And earlier this month, the S&P 500 notched a 20% gain from its October 2022 low, putting it in “bull market” territory.

✍️ Connecting The Dots

When an investment has risen 20% from its most recent low point, it’s said to be in a “bull market”. On the flip side, it’s in a “bear market” if it’s fallen 20% from its recent high. On the face of it, these terms are pretty arbitrary: after all, there’s nothing inherently special about a move of 20% compared to, say, 19% or 21%. But that 20% anchor’s been part of the investment universe’s furniture for so long, it’s grown its own psychological significance – and therefore what it indicates, good or bad, becomes self-fulfilling in its own right.

Now, this new bull market might surprise you. After all, still-too-high inflation is going to require more interest rate hikes, which will dampen economic activity and companies’ earnings growth. Plus, there’s still the risk that the US Federal Reserve’s rate hikes, in particular, will “break something”. And, frankly, it already has: Silicon Valley Bank broke, other US regional banks broke, Credit Suisse broke, and US-China relations, demand for commodities, and commercial real estate all broke too. But the economy isn’t the stock market – and the stock market hasn’t broken, not by a long shot.

In fact, it’s forced professional investors who were bracing for the worst to become less pessimistic, and it’s led retail investors to climb aboard, all of them riding an AI-induced wave in tech stocks that’s driven all the US market’s returns this year so far. And with five of Big Tech’s biggest stocks responsible for the vast majority of the gains and representing about a quarter of the key US stock market index, it’s perhaps no surprise the S&P 500’s back in bull territory.

🥡 Takeaways

1. It might be time to grab this bull by the horns…

You’ve probably heard or read from us (or someone else – how could you?!) that over time stock market prices generally rise. Well, here’s a stat: the S&P 500 has been in a bull market for 83% of trading days since 1950. Put another way: bull markets are when you can build wealth if you’re disciplined and investing for the long-term. History doesn’t often repeat itself but patterns from the past can be instructive: for instance, bull markets (based on the past ten) typically last about five and a half years. This time around, though, you could argue that AI has driven a fundamental change and that we’re actually in a whole new world (cue the Aladdin theme). The magic of AI is widely expected to supercharge productivity, bump up profit margins, and lift companies' earnings, and that could mean stocks have more upside than most investors think.

2. Or, it might be just another cock-and-bull story.

The S&P 500 has notched an average gain of 43% in the first year of a bull market, but that (admittedly meteoric) rise isn’t always smooth – there are often a few dramatic drops along the way. You can be optimistic about where long-term prices are headed while thinking that in the short-term, they’re a bit too high – and in fact, there are options strategies that can help you express that view via your investments. In almost every bull market in the past 70 years, US stocks have dropped 10% to 20% (what’s known as a “correction”) before resuming their upward march. And with plenty of potential red rags that could drag this young bull market off track, it’s tough not to bet against that happening sometime soon.

🎯 Also On Our Radar

The machines are taking over China: investment funds that make bets based on a set of computer algorithms have outperformed those that depend on human decision-making in the six months through May. The machine-driven funds made 10% on their stock market bets versus 7.4% for people-based “active” funds. It’s no wonder, then, that their popularity’s rising at the expense of their carbon-based rivals.