Between Doubt and Upswing

A look back at history shows that bull markets emerge when investors mentally move past a crisis. This leads to a rally that typically lasts a year or more, driving stock markets to new highs. However, today's market does not exactly give that impression. But if this is indeed a genuine bull market - meaning the upswing would be sustained - it could be a sign that a major shift in market psychology is underway.

Why does it not feel like we are in a bull market?

Because the central banks' job is not yet done. As long as inflation remains above 2%, they have an excuse to continue weighing on the economy with high interest rates. Until we get inflation under control, a recession cannot be ruled out.

Furthermore, it is hard to ignore that not all stocks are rising at the same pace. Small-cap companies, which are usually at the forefront at the start of a bull market, have lagged miles behind the heavyweights this year. Cyclical sectors - or industries that typically perform better when the economy is growing - have also fallen behind. Most of this year's gains are driven by a handful of mega-cap tech stocks, while the rest of the S&P 500 lags behind the index.

Now comes the tricky part: bull markets rarely feel like bull markets at the beginning. Since 1950, the S&P 500 has bottomed out an average of three months before the end of a recession. And if you wait until things feel better, you might miss the start of the bull market.

How do I know if this is truly a new bull market?

This could depend on what we see in the labor market and in corporate earnings. If consumers and businesses continue to do well (hiring and employment have remained consistently high so far), then investors have a good reason to stay optimistic.

Good news: the data could get even better. Analysts now expect that S&P 500 earnings could rise quarter-on-quarter - a trend that historically has marked the end of the bear market.

Of course, "better" is not synonymous with "good", and there are still signs of slowing growth. But we could be in a situation where investors are braced for the worst-case scenario while slowly warming up to the "best-case" scenario.

How likely is it that Wall Street is wrong and we are still in a bear market?

Momentum is on the investors' side right now. History shows that it is unusual for stocks to rise continuously for eight months and then suddenly plunge to new lows. This has happened only once since 1950 - during the dot-com bubble.

How long can this bull market last?

If this is indeed a bull market, then historically, the rally could last a while. Since 1950, bull markets have lasted an average of 5.5 years - four times longer than bear markets over the same period. During these bull markets, the S&P 500 gained an average of 183%.

Of course, each bull market can look drastically different. The most recent bull market, which lasted from March 2020 to December 2021, ended just short of the two-year mark. Prior to that, we experienced an 11-year bull market as we crawled out of the Global Financial Crisis.

Bull markets rarely move in a straight line upward. In most bull markets over the past decades, there has been at least one correction of 10% or more, alongside numerous headlines suggesting an imminent end to the bull market. Sell-offs happen, even in strong bull phases.

Because the central banks' job is not yet done. As long as inflation remains above 2%, they have an excuse to continue weighing on the economy with high interest rates. Until we get inflation under control, a recession cannot be ruled out.

Furthermore, it is hard to ignore that not all stocks are rising at the same pace. Small-cap companies, which are usually at the forefront at the start of a bull market, have lagged miles behind the heavyweights this year. Cyclical sectors - or industries that typically perform better when the economy is growing - have also fallen behind. Most of this year's gains are driven by a handful of mega-cap tech stocks, while the rest of the S&P 500 lags behind the index.

Now comes the tricky part: bull markets rarely feel like bull markets at the beginning. Since 1950, the S&P 500 has bottomed out an average of three months before the end of a recession. And if you wait until things feel better, you might miss the start of the bull market.

How do we position ourselves?

This year, we are seeing the exact opposite picture of last year – growth stocks have been running like crazy so far, while value stocks are lagging behind.

Swiss heavyweights (Nestlé, Roche, and Novartis), which make up around 45% of the Swiss Performance Index SPI, have had relatively disappointing performances so far. Roche is down since the start of the year, Nestlé is flat, and Novartis is slightly up.

We still believe that monetary policy will gradually transition toward easing. Whether the first rate cut comes this year or next is anyone's guess. We believe that now is the time to position ourselves in the market. As already described in the Q1 2023 newsletter, we have gradually reduced our cash holdings and continue to trim them.

We remain in a balanced position so we are not caught off guard. We also do not see clear indications of whether to overweight value or growth. Therefore, we are positioning ourselves in both areas.

Although inflation has not yet been defeated, the trend is moving in the right direction!

As always, we thank you for the trust placed in us and wish you relaxing summer months!