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By Josh Schafer
On Thursday, the S&P 500 closed more than 20% higher than its October lows.
A 248 day bear market was the longest for the S&P since 1948 during the recent run back to a bull market. In spite of the aggressive Federal Reserve rate hike campaign, regional banking turmoil, and incessant recession fears that haven’t fully materialized, the benchmark index grew resilient.
In the 12 months following the start of a bull market, the S&P 500 rises 92% of the time, compared to the historical 75% average.
Savita Subramanian and the equity strategy team of Bank of America Global Research wrote in a note on Friday that “we are back in bull territory, which could be part of what it takes to re-energize investors. As a result of lower returns or negative opportunity costs in bonds – which are likely to occur if real rates rise from here – investors should be encouraged to invest in equities, especially cyclicals that will benefit from rising real rates.
On Thursday, the S&P 500 closed up more than 20% from its October lows.
The recent S&P run back to a bull market lasted 248 trading days, making it the longest bear market since 1948. In spite of the most aggressive Federal Reserve rate hike campaign in four decades, regional banking turmoil, and incessant recession worries that have not yet materialized, the benchmark index rose resiliently.
Bank of America research shows that the S&P 500 rises 92% of the time after the start of a bull market, compared to a historical average of 75%.
According to Savita Subramanian and the Bank of America Global Research equity strategy team, investors may have to re-engage with equities if we are back in bull territory. As a result of lower returns and negative opportunity costs in bonds – likely if real rates rise from here – investors should be encouraged to return to equities, particularly those that benefit from rising real rates (cyclicals).
According to Carson Group Chief Market Strategist Ryan Detrick, stocks have bounced up 20% from a 52-week low 13 times since 1956. Stocks have usually been choppy for the first three months of a bull market, with the benchmark index actually falling 0.5% on average in the first month after entering bull market territory.
The S&P 500 averaged a 10% return over the next six months, and 17.7% over the next 12 months, after rallying 20% from market lows.
Detrick said that studies like this do little to change his opinion. “We continue to expect stocks to do well this year, and the upward move is firmly in place,” he added.
This chart from Bespoke shows how stocks usually perform after entering a bull market.
The path higher for stocks remains a rocky one. Next Wednesday, the Federal Reserve is expected to pause its interest rate hiking process. However, that isn’t necessarily a tailwind for stocks, since economists believe the Federal Reserve pauses as it waits for fiscal policy to take effect.
As a result, economic growth would likely slow, allowing inflation to ease, but potentially also pressuring earnings growth. Morgan Stanley recently predicted a 16% decline in corporate profits by year’s end.
In the long run, however, history will remain on the side of stocks.
According to Subramanian and BofA, “sentiment, positioning, fundamentals, and supply/demand still support that being underinvested in stocks and cyclicals is still a key risk today.”
