Bull market expected after S&P 500 hits new highs this year By Reuters

© Reuters. FILE PHOTO: The Charging Bull statue, also known as the Wall St. Bull, is pictured in the Financial District of the borough of Manhattan in New York City, USA, September 9, 2020. REUTERS/Carlo Allegri/File Photo

Saqib Iqbal Ahmed

NEW YORK (Reuters) – The bulls are almost loose.

‘s frenzied year-end rally pushed the index to its highest level in 2023, just 4.2% off the all-time high it reached in January 2022.

According to the commonly used definition, if the S&P 500 closes above 4,796.56, it confirms that the index has entered a bull market since bottoming on October 12, 2022. The benchmark index is up 19.7% this year and is up 28.5% from its October 2022 low.

A look at past bull markets shows that investors should expect stocks to take a breather before moving higher.

At the same time, many hurdles remain for U.S. stocks, including the possibility that the Federal Reserve’s interest rate hikes will cool the economy, upsetting hopes for a soft landing that had fueled stocks gains.

Smaller than the average bear.

With the S&P 500 hitting a new year’s high on Friday, investors are all but convinced that the bear market that began in January 2022 is over.

Some investors specifically define a bear market as a decline in stocks or indices of more than 20% from their previous highs. By that definition, the bear market that began with the S&P 500 breaking its previous record on January 3, 2022, wasn’t particularly painful.

The S&P 500 fell 25.4% from its low, marking the fourth shallowest bear market the index has experienced since 1928, according to data from Yardeni Research.

At the same time, based on data from Yardeni Research since 1928, this period was 282 days, somewhat shorter than the average bear market period of 341 days.

strong as an ox

History also shows that bull markets tend to feed on themselves because better stock performance leads investors to sit on the sidelines and increase their appetite for risk.

Over the past 50 years, stocks have averaged gains of nearly 260% in six bull markets.

not that fast

Of course, stocks rarely rise in a straight line. Over the past 50 years, the S&P 500 has gained an average of 16% during the three months leading to a bull market.

In contrast, the S&P 500 gained only 0.2% and 2.0% on average in the first and third months after the bull market was confirmed.

Are there speed bumps ahead?

At the same time, there is no shortage of factors that could slow the upward trend or undermine investor confidence.

Many investors are watching the U.S. economy. Stock gains were supported by expectations of a soft landing for the economy, where the Federal Reserve could ease inflation without significantly hurting growth. But signs that growth may be slower than expected due to the Fed’s 525 basis point rate hike could call for a more cautious approach to stocks and other so-called risky assets.

The inverted yield curve, one of the signs of a recession, continues to fascinate investors. Since July 2022, the yield on two-year Treasury bonds has been higher than the yield on 10-year Treasury bonds. According to a 2018 report by researchers at the San Francisco Federal Reserve, the 2/10-year yield curve has inverted six to 24 months before a recession since 1955.