If you look at the major U.S. equity market indices, you’d probably conclude that everything is awesome! The market is ripping, AI mania has sent tech stocks soaring and the CBOE Volatility Index (VIX), the popular measure of market volatility, just hit 3-year lows. Even if the stock market isn’t your thing right now, you can park your money in short-term Treasury bills yielding more than 5%!
As of now, the S&P 500 has gained more than 20% off its mid-October 2022 low. That’s the level that a lot of market watchers will tell you defines the start of a new bull market. Is it though? Investors are sure trading like it is, but there are two pieces of evidence that suggest it isn’t.
Shape of 2023 Recovery Clashes With History
The first is the shape of the recovery itself.
New bull markets tend to begin with an overall sentiment of capitulation. Stock prices have declined significantly. Since most investors are performance chasers, they’re adding to the selling pressure after prices have already gone down. There’s a general malaise hanging over the market about how much money has been lost.
When there’s finally a catalyst that reverses sentiment, it’s usually enough to ignite a sharp and swift rally. While one could point to the peak of inflation or the enthusiasm surrounding AI as those potential catalysts, there really hasn’t been the big marker that would indicate a turning point. The U.S. economy has remained healthier and more resilient for longer than originally anticipated, but that’s not really a reversal. It’s more of an extension, and that’s why this rally doesn’t look like the others.
Of the bull market inceptions over the past century, the average rally to 20% has taken around 60 days. In 2022-2023, the road to 20% has taken 240 days.
The length of time it’s taken to get to this point this year is not even close to how long it’s taken historically. The next longest 20% rally took nearly 100 fewer days to get there — and that was all the way back in 1929!
Another element of this data set is just as interesting. Let’s say that this is indeed the start of a new bull market even though it’s taken 8 months to get there. How does that compare to the first 8 months of past new bull markets?
Again, not favorably. This would be the second smallest gain to start a new bull market. In other words, this would be perhaps the slowest and shallowest ever start to a bull market.
7 Top Stocks Are Leading the ‘New Bull Market’
The second piece of evidence that suggests we are not in a bull market is the composition of the current rally.
We talk about the S&P 500 as the stock market benchmark, but this year it has been all about the S&P 7 – Nvidia (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Meta Platforms (NASDAQ:META) and Tesla (NASDAQ:TSLA). Those handful of stocks have accounted for almost all the market’s gains this year.
Look at it another way. The equal-weighted S&P 500, which minimizes the influence of the FAAMG names, trails the traditional index by more than 10% year to date. The gap between the comparable tech sector indices is roughly 20%. If you’re using the S&P 500 and Nasdaq-100 as your measuring sticks for stock market health, you’re missing a big piece of the picture.
Like an onion, this market gets stinkier once you start peeling back the layers. If the broader U.S. stock market is actually much weaker than it looks and the current rally would qualify as one of the weakest starts to a bull market ever, is it really the start of a new bull market?
The evidence suggests that it’s not.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
