The traditional fourth-anniversary gift is fruit or flowers, according to the arbiters of etiquette. Which fits pretty well with this market moment, four years to the day since the Covid-crash low, which finds investors now savoring sweet returns and adopting a distinctly rosy outlook. Since that distressed moment of mass fear and urgent asset liquidation, the market has done what it typically does following a panic: delivered profits far above average. The four-year total return for the S & P 500 since March 23, 2020, is just about 150%, or 25.7% annualized. And that’s including a 25% setback from high to low in 2022. .SPX mountain 2020-03-23 S & P 500 since the Covid low This is, of course, an idealized starting point from which to measure performance. And in truth the 34% February-March 2020 black-swan dive was so sudden and so quickly reversed that not all that many investors locked in those prices. While the S & P 500 bottomed at around a three-year low under 2,200, the index spent only a few weeks under 2,500. How much is left? Still, the vertical distance traveled since then — not to mention the 27% surge since late October without so much as a 2% wobble along the way — has even optimistic investors checking the imaginary market fuel gauge for an idea of how much is left in the figurative tank. While it’s more a notable tidbit than a prophesy, the 25% annualized return of the past four years quite closely resembles the four-year pace of gains the S & P 500 logged off the March 2009 global financial crisis bottom, and the August 1982 kickoff to the great ’80s-’90s golden era for stocks. Those were both generational bottoms from levels first seen more than a decade earlier, of course, while the 2020 low was more a brief, ugly blip in an ongoing bull market. Still, after the fourth year from the bottom, those earlier rallies somewhat slowed but kept chugging for a while. Stretching the tape measure only back to the October 2022 low, which was set during the inflation surge and Federal Reserve’s tightening counteroffensive, the current rally is decidedly unremarkable compared to the average path of the past 11 bull cycles, with the typical path forward a less-steep climb, as HSBC shows with this chart. In several specific ways, the market behavior is also not displaying the hallmarks of nearing a decisive, lasting market peak. A four-month, 25% gain in the benchmark – sealed at the end of February – is overwhelmingly associated with further gains, as is a 5%-or-better S & P 500 gain in the first quarter of the year. Last Thursday saw the greatest number of S & P 500 stocks hitting a 52-week high in three years, and Renaissance Macro notes that “rarely do we see a market peak with a coincidental peak in 52-week highs.” Similarly, Bespoke Investment Group counts seven prior times the index has gone at least 100 days without a 2% setback, and it was higher six months later each time, for gains between 1.7% and 15.8%. More qualitatively, it’s a bull market, and in a bull market the overshoots occur to the upside, so a rally being “ahead of itself” is not fatal. Note, too, that there have been two cyclical bear markets in the past four years – more than the typical frequency. And the S & P 500 is only 9% higher than it was more than two years ago, hardly reaching escape velocity from planet Sanity. As if answering investors’ constant complain last year, the market has broadened out quite a bit, with industrials, homebuilders, even energy and basic materials showing life. To substantiate this action, earnings growth will need to become more general as well. There is at least the potential for fundamental catch-up: Warren Pies of 3Fourteen Research points out that only 37% of S & P 500 stocks have their earnings level at a two-year high. Another thing about bull markets: It’s not only the cleverest investors or the traders “with an edge” who make money. It’s everyone who simply holds on. This point can be hard to keep in mind when observing that the “don’t overthink it” crowd is happily fully invested due to the widely acknowledged positive news flow. We have an economy that keeps surprising with its resilience, an ongoing revival of corporate earnings growth, flush credit markets, benign Treasury yields, global equity indexes confirming U.S. strength with their own record highs, a frenzied AI buildout and a Fed looking for an opening to ease policy into this bounty of blessings. There may not be much of a wall of worry for the market to climb compared to six months ago, but for now good news is doing the trick. Last week, the known catalysts were Nvidia’s developers’ conference/revival meeting, the Bank of Japan exiting a negative-interest-rate regime and a Fed meeting that updated the committee’s outlook on the economy and rates. All three flashed green in sequence like traffic lights on a traffic-free avenue. Turbulence ahead? Which is not to say that things will stay this easy, or that the market hasn’t already taken credit for some wins in games not yet played. The most conspicuous causes for caution are not imminent storms but more atmospheric conditions that can sometimes cause turbulence. The strongest six months of the year for stocks is about to end, valuations are elevated and – depending on how it’s measured and deciphered – investor sentiment is trending toward overconfidence. Ned Davis Research chief global strategist Tim Hayes on Friday handicapped what might warn of a market stumble, using the firm’s array of cyclical, sentiment and technical models: “As long as rate cuts remain a high probability, the cyclical bull should persist, though not without some volatility ahead. With optimism excessive and the seasonal and cyclical tailwinds fading, keep an eye on the breadth, leadership [and index] concentration …for signs that a downturn is underway, most likely a correction that will relieve the optimism and set the stage for the bull market to resume.” Rate cuts remaining a probability isn’t the same as rate cuts needing to happen soon or to be particularly deep. Markets do quite well during prolonged pauses between Fed tightening and easing, and slower, more measured rate-cutting cycles have tended to be better (think 1995) than aggressive ones in which policy makers are rushing to aid an ailing economy. The sentiment question is nuanced. No doubt bullishness has become more the consensus stance, but this isn’t unusual or alarming in a bull market on its own. Rocky White, quantitative analyst at Schaeffer’s Investment Research, last week noted the long-tenured Investors Intelligence survey of market advisory services registered bulls surpassing 60%, good for the 95 th percentile of optimism dating to 1971. Forward returns from such levels in the past were somewhat below average, with heightened risk if a near-term pullback, but over the following year stocks were still higher more than two-thirds of the time. The Bank of America global fund manager survey likewise showed investment professionals warming to risk. But a composite sentiment measure that blends managers economic-growth expectations, cash holdings and equity exposure is up sharply, but only to about neutral levels. When not operating in hindsight mode, the market setup always tends to look tricky. The weight if the evidence argues against an imminent major market peak, but that doesn’t guarantee a smooth and painless ride indefinitely. The market doesn’t owe investors much or anything give recent performance and valuations. And just because it’s a cliché to point out election years tend to spur volatility before summer is out doesn’t make it untrue. Sounds like it makes sense to stay involved and keep expectations in check, as ever.
It’s been four years since the market’s Covid low with the S&P 500 returning 25% annualized since
Mar 25, 2024
