Author: Thomas A. Martin, CFA, Senior Portfolio Manager
The new Bull Market broke out at the beginning of June. That’s if you go by the 20% rule and use the S&P 500 as your representative index. That’s almost exactly one-and-a-half years since the bear market started at the very beginning of 2022. The bear market lasted almost ten-and-a-half months, ending in mid-October and delivered a total return drawdown of -24.5%. So far, the new bull market has run for a little over eight months and made a recent high on June 15th, logging a total return to that point of +25.2%, and has backed off the last few days. That high is down a mere 5.4% from the all-time high, quite a significant reclaiming of the painful 2022 drawdown.
What’s changed…? Inflation has peaked (so it appears), and interest rates are bumping along what many believe are the highs for the cycle. The widely hailed 1H23 recession that felt like a given at the end of 2022 never got to the zip code, while employment remained strong, and the consumer continued to spend. EPS growth for the S&P 500 went negative in 4Q22, is expected to reach its biggest decline this quarter at -6.6%, and resume growth next quarter.
After hugely underperforming value in 2022, growth has hugely outperformed value so far in 2023. Market breadth has been very narrow this year, concentrated in seven or so stocks as every market commentator has been happy to repeat ad nauseum. This has changed somewhat recently as small cap and equal weight measures have caught somewhat of a bid lately.
One of the more noticeable reversals has come in sentiment. Broadly speaking, sentiment was extremely (yes, extremely) bearish throughout most of 2022 and a good part of 2023. Along with the move to a new bull market, sentiment improved to neutral and now sits at levels that are being characterized by several market pundits as overly (extremely?) optimistic, and pointing out that this is not typically a good combination for forward positive returns.
After raising rates ten times in a row at each successive meeting, the Fed did not turn it up to 11. Not a “skip” and not a “pause,” it is being billed as a further “slowing of the pace,” and the jawboning and the Dots show an indication of more to come. Rates have finally reached a level at which they are acknowledged to be restrictive in theory, but as a practical matter the effect has not been nearly what had been expected.
Lumped into the “other” category of things that are “behind us,” at least for the time being, are the debt ceiling, a banking crisis and a strong coming-out-of-covid recovery in China. And in a category all its own, fueling excitement and upside is AI, AI, and AI.
…and where do we go from here? We stress that the set-up and structure of the macro-economic world remain extremely complex and that the range of outcomes for many of the variables continues to be unusually wide. The markets have come a long way in a short period of time and optimism is high, so the argument for caution in the near term is strong. Surprisingly though, notwithstanding the run in growth, enough can be attributed to earnings upgrades and valuations relative to growth are not extreme. Compared to past bubbles, where markets are today doesn’t make the cut.
Inflation is likely to remain an issue, but we expect it to continue to move lower. The Fed may raise the Fed Funds rate, but we don’t believe longer-term rates will eclipse the highs reached last year. Perhaps most importantly, we believe the question of whether the bear market of 2022 was secular or cyclical has been answered, and the secular bull market that began in 2009 is still intact.
We are maintaining our positioning for now, given the crosscurrents and the high level of risk, and characterize our outlook as positive but alert.
Source: FactSet
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