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The stock market has pushed higher in recent months, gradually recovering much of the ground lost in 2022. Some observers have heralded the start of a new bull market of generally rising prices. Is this something worth getting excited about?
Maybe so, but the new trend, if it holds, doesn’t mean all stocks will advance. There’s also some misunderstanding about what bull markets are all about, along with bear markets, their mirror images.
Is there a consensus that a new bull market has started?
Not really, though many analysts consider a rise of 20% from the prior low as meeting the definition of a new bull phase. The widely followed Standard & Poor’s 500 index on or around June 8 marked a 20% advance from its low last October.
But the S&P 500 is just one market barometer, though arguably the most widefly followed. Other measures aren’t yet near the 20% mark, such as the Russell 2000, which tracks smaller stocks. And even the S&P 500 remains well below its all-time high of around 4,800. Conversely, other market barometers such as the tech-heavy NASDAQ surpassed the 20% level weeks ago.
But at least most stocks are rallying now, right?
Many are, but most stocks haven’t risen 20% from their lows last fall, which is why some advisers are skeptical of this latest upward phase. This rally has been driven by huge gains generated by a smattering of large, tech-focused companies, especially those perceived to be leaders in artificial intelligence.
Seven dominant tech companies — Apple, Amazon, Alphabet, Microsoft, Meta, Nvidia and Tesla — combined weigh in with roughly 28% of the stock market’s overall capitalization or value and are projected to generate around 16% of total earnings for the S&P 500 this year, reports Sheraz Mian, research director at Zacks Investment Research.
The combined earnings of those seven corporations are projected to rise 13.2% in the current, second quarter, while earnings for the other 493 companies in the S&P 500 are expected to tumble 12%, he added (with overall earnings for the full index slated to drop 8.9%).
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The outsized impact of the biggest stocks has surpassed “even the lopsidedness of the market at the height of the Dot Com bubble in 2000,” said Phillip Wool, managing director at Rayliant, an asset-management company.
“Such a lack of breadth often precedes an economic downturn and suggests investors have been overly optimistic in bidding up such a small subset of stocks,” wrote Wool in a recent commentary. He is skeptical of whether a true bull market has started.
How can stocks be in an upward trend with so much anxiety?
Consumers are concerned about a lot of things right now, including still-hefty inflation, rising interest rates, bloated credit-card balances and more. But it’s not unusual for stocks to rally when public confidence is low. In fact, bull markets usually commence when the public mood is grim, and they often peter out when seemingly everyone gets excited about investing.
A survey of investors last October, right around the time the market was bottoming — and thus an optimal time to invest, in hindsight — showed widespread and worsening pessimism, according to the study conducted by the University of Michigan.
“The last time a decline of this size and speed was observed in the data was just prior to the Great Recession,” the university said in a report at the time. “While this comparison does not necessarily imply that stock owners expect a financial crisis, there is considerable uncertainty going forward.”
More recently, just 34% of Americans said they expected stock prices to be higher 12 months from now, according to a survey of consumer expectations taken in May by the Federal Reserve Bank of New York.
If a bull market has arrived, can be we expect steady gains?
No. Stocks rarely generate steady gains. Usually, they come in fits and starts, not in a smooth upward trajectory. Looked at another way, stocks have appreciated at an average clip of about 11% over the long haul. But in only a handful of calendar years have returns actually approximated that number.
However, if we have entered a new bull market, it could last a while. Since 1929, the average gain for the S&P 500 during bull markets has approximated 130%, and these upward phases have lasted for 39 months on average, reported Adam Turnquist, chief technical strategist at LPL Financial.
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FOMO, or the fear of missing out, might be prompting a lot of the recent buying. Favorable economic developments including steady employment gains, slowing inflation and a possible pause in Fed interest-rate hikes also have helped brighten the mood.
Where did the ‘bull’ and ‘bear’ terms come from anyway?
Origins of the terms are murky, but they possibly reflect how the two animals attack. “That is, a bull will thrust its horns up into the air, while a bear will swipe down,” reports Investopedia.
But there are other explanations and references for the terms, which also can apply to price movements for bonds, commodities and other assets (though less commonly for housing). The key point is to recognize that a bullish trend signals rising prices, while a bearish trend reflects the opposite.
Reach the writer at russ.wiles@arizonarepublic.com.