Wednesday, June 14, 2023
Now that the S&P 500 Index has entered a new bull market (by gaining 20% or more since the October 2022 lows), it’s logical to ask the question of when the index might achieve a new all-time high.
At 4,369 on the S&P 500 as of the market close on June 13, 2023, the index is just 9.8% away from eclipsing the record high from January 3, 2022 at 4,796.56. So how long might it take us to get there?
Historically, the index has taken an average of 19 months to recover from bear market declines of 20% or more, as shown in the accompanying table. The current rebound from the bear market low in October 2022 is now just eight months old, suggesting an additional 10% gain could potentially take almost another year to achieve.
As shown above, recovery times vary widely and depend on the economic environment. When bear markets are not accompanied by recession, recoveries from bear markets only took an average of 10 months to reach a new record high. It might be going out on a limb to predict a 10% rally and a new record high for the S&P 500 by mid-August, but the historical pattern for young bull markets suggests stocks may have some more room to run here. Perhaps the lack of a recession in this environment (so far, at least) means the timetable to return to the January 2022 highs could be closer to 10 months than 19. On the other hand, if recession begins this fall, before those new highs are reached, it could be well into 2024 before the S&P 500 eclipses the 4,796 mark.
This analysis doesn’t change the LPL Research Strategic and Tactical Asset Allocation Committee’s (STAAC) neutral stance on equities from a tactical asset allocation perspective. The STAAC still sees the risk-reward between equities and fixed income as fairly balanced currently, even while acknowledging this analysis points to more gains over the rest of the year. As we wrote about here in last week’s Weekly Market Commentary, the technical evidence that stocks may be due for a pause, coupled with the attractiveness of fixed income relative to equities, suggests it is prudent to keep portfolio risk levels near benchmarks, with a bit of an additional fixed income cushion to help mitigate potential equity market volatility and enhance income. Also, consider the possibility that lower interest rates enhance bond returns, consistent with the end of prior Federal Reserve rate hiking cycles.
In conclusion, with bonds offering some of the richest yields in decades, the risk-reward for stocks is no longer compelling, in our view. Strong momentum may carry the market a bit higher from here, but with the S&P 500 within our fair value range of 4,300 to 4,400, it seems like a logical spot for stocks to take a breather.
For more of LPL Research’s thoughts on the near-term outlook for stocks, see our latest LPL Market Signals podcast here.
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All index and market data from Bloomberg.
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