On the brink of a new bull? – What makes this cycle unique

DEWITT, Mich. - June 13, 2023 - PRLog --

• The S&P 500 is up about 20% from its mid-October lows, a threshold that could indicate a new bull market.
• We think the foundation of a new bull market is formed, but an economic slowdown is still possibly ahead of us. Pandemic distortions have made this cycle unique by delaying, but likely not cancelling, the impact of higher rates.
• The upcoming CPI release and Fed meeting are likely to set the tone for the remainder of the summer.
• We would view any renewed phase of volatility as an opportunity to position for a more sustainable rebound that is likely to have broader shoulders than what we have currently seen.

Equity markets reached a new high for the year, adding to their recent gains ahead of the likely market-moving inflation reading and Fed rate announcement this week. While stocks are still a ways off their record highs, the S&P 500 is up about 20% from its mid-October lows, a threshold that could indicate a new bull market¹.

The rally has been powered by enthusiasm around artificial intelligence (AI) and a resilient economy that has defied expectations for a slowdown in the face of higher interest rates. But central banks are taking notice, with the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) surprising markets with more tightening.

Longest bear-market rally, or one of the weakest starts to a bull market in history?

The path that markets have followed since October appears different from what tends to happen around major inflection points when looking at duration and strength. If we remain in a bear market, at eight months since last year's low, the rise in equities would mark the longest bear-market rally in history (the average bear market rally has lasted about two months)².

Small-cap stocks show signs of life as tech takes a breather

During the early stages of a bull market, the "average" stock, as proxied by the equal-weighted S&P 500, tends to outperform the market-cap weighted index. Similarly, small-cap stocks, which are sensitive to economic growth, tend to outpace large-cap stocks. This year market leadership has stayed very narrow, with just a handful of mega-cap stocks accounting of most of this year's gains. To gain confidence about the lasting power of the rebound, broader participation is needed. On that front, June brought some encouraging news. As the tech and communication services sectors paused briefly to digest their sharp year-to-date gains, the traditional cyclical sectors and small-cap stocks have stepped up to fill the void.

Source: 1. Bloomberg 2. FactSet, Edward Jones