Wednesday, April 12, 2023
Today marks the six-month anniversary from the October 12, 2022 low in the S&P 500. Since the 25.4% drop in the index from January 3, 2022 through that day in October (is it me or do bear markets often end in October), the S&P 500 has rallied 15.1%, as shown in the accompanying table. That sounds pretty good, right? Well, it’s not, based on history.
The table below shows the average gain for the S&P 500 six months off the bear market low is 25%. So this bull market, which isn’t officially a bull market because the index has not yet achieved a 20% gain, would be one of the weakest. In fact, of the 17 bear markets since WWII, just three were followed by a smaller gain than 15% in the first six months of the subsequent bull market, and only one of those occurred within the last 60 years—the bull that started on October 9, 2002, after the 2001 recession and accounting scandals involving WorldCom and Enron.
Another way to look at what we would call underperformance of the (possible) new bull market is by comparing the average return progression for all of the new bull markets during their first year, and plotting that against the current rally since the October 2022 lows. As you can see in the chart below, the gains over the past six months have lagged well behind the average advance.
The logical question to ask here is what does this mean for stocks going forward? We hope it means stocks will play some catch-up, propelling the index to a new bull market more than 20% above the October lows. That level, which is 4,292, is just 4.5% from Tuesday’s close at 4,109—not too far away.
A less appealing scenario is one where a second half recession hits earnings and drags stocks down below the October 2022 lows before a new bull market begins. Then we’d start the clock over. Though not our base case, if new lows are established later this year, perhaps the bounce off of those new lows would be stronger than what we’ve seen in the past six months.
We believe the first of these two scenarios is more likely given inflation pressures are easing, interest rate volatility has moderated, and a recession, if we have one, is likely to be short-lived and mild, in our view. Also consider no bear market has bottomed before a recession takes place, though several bear markets were not accompanied by recessions at all, such as the 1987 bear, making this at least a plausible scenario. The close call in 1998, when the S&P 500 lost just shy of 20%, may be another reasonable historical analogue.
Bottom line, LPL Research believes a new bull market will be established before the next bear begins. However, this bull—if it is one—ranks near the bottom in terms of early-stage performance and may not be set up for the type of surge seen in past rebounds. Time will tell whether slow and steady ends up winning this race.
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All index and market data from Bloomberg.
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