Between Doubt and Upswing

A look to the past shows that bull markets arise when investors mentally leave a crisis behind. This leads to a rally that typically lasts a year or more, driving stock markets to new highs. Today's market, however, does not quite give this impression. If this were a genuine bull market, however - meaning that the upswing would be built to last - it could be a sign that a major shift in market psychology was underway.

Why doesn't it feel like we are in a bull market?

Because the central banks' work 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 cannot be overlooked that not all stocks are rising at the same pace. Small-cap companies, which typically lead at the beginning of a bull market, have lagged miles behind the giants this year. Cyclical sectors - or industries that generally perform better when the economy is growing - have also fallen behind. The bulk of this year's gains are attributable to 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 first. 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 really 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 good reason to remain optimistic.

Good news: the data could get even better. Analysts now expect S&P 500 earnings to rise on a quarterly basis - 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 starting to warm up to the "best-case" scenario.

What is the probability that Wall Street is wrong and we are still in a bear market?

Momentum is on the side of investors at the moment. History shows that it is unusual for stocks to rise continuously for eight months and then suddenly drop to new lows. That has only happened once since 1950 - during the Dot-Com bubble.

How long can this bull market last?

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

Of course, every 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. Before that, we experienced an 11-year bull market as we crawled our way out of the Global Financial Crisis.

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