The past few weeks’ headlines and market analysis saying stocks are in a bull market, even if they are potentially misleading, can be a comfort.
They are based on the unassailable fact that the S&P 500 is up more than 20 percent from its previous low, which occurred on October 12. The Federal Reserve is expected to raise interest rates further this year, which has had an impact on the market. Yet if inflation, which rose to an annual rate of 4 percent in May, falls sufficiently, the Fed could keep rates steady, or even begin lowering them — and the stock market will do well. can grow from
But is it really a bull market? It may eventually be one, but right now, there are some big caveats.
First of all, if a bull market to you means stocks are clearly trending upward, then, no, the bull market label is being applied incorrectly right now. It is not at all clear what the market trend will be for the next month or year. Second, even as a retrospective measure of how the market has performed, this bull market designation is premature, using a stricter definition that seems more sensible to me, as I Will explain
popular definition
An oft-repeated definition — and one that, I think, is too simplistic and potentially dangerous — is that a bull market is one that has risen 20 percent from its last bottom. (Using the same logic, a bear market is one that has declined 20 percent from its previous peak.)
It seems straightforward. it is sometimes called a “Officer” Definition, though it’s nothing like that.
The main problem with that definition is that it seems to say nothing about where the market is going. It’s not much of a bull market if you’re losing money. Yet investors who have been in the stock market since the beginning of last year have lost their money.
Remember that to be classified as a bear market, stocks have to fall at least 20 percent. This means that a bull market would require at least a profit 25 percent To eliminate bear market losses. (Assume you have $1,000 in the market and it declines 20 percent to $800; it would have to gain 25 percent, or $200, to return to $1,000.)
For investors who catch the broad market through low-cost index funds, as I do, the simple 20 percent definition means that you have lost money since the market peak. To believe that this is a true bull market, you need to believe that it will continue to grow. It’s magical thinking, and with the Fed notation It intends to raise interest rates further, it is dangerous.
Wall Street makes fast money. When people put their savings in stocks, it makes profit. I’ve pointed out that the annual Wall Street forecasts are wildly wrong, usually due to being overly optimistic.
But after major declines in bear markets, such as in 2022, they are often overly pessimistic. In December 2022, the average Wall Street forecast was for the S&P 500 to end 2023 at 4,009, but the market is now much higher than that. As they often do mid-year when their forecasts are off the mark, investment firms have been raising their forecasts as of late. Goldman Sachs did this in a note to clients on June 9, saying, “We raise our S&P 500 year-end price target to 4500 (from 4000), which represents an upside of 5%.”
More rapid revisions by Wall Street firms are likely. But it doesn’t mean much. The forecasts will be revised downwards if the market falls sharply. The fact that the market has gone up doesn’t mean it will continue to go up – until investors start believing it and act on that bullish belief, driving the market higher. A bull market based on emotional enthusiasm and not supported by rising earnings can easily become a bubble.
History of Fuzzy Metaphors
Bulls and bears and bubbles have been an ambiguous metaphor for centuries. These fiery but accurate words were popularized by great writers – and pathetic investors – in the 18th century.
Poet, satirist and stranded investor Alexander Pope talks about bulls and bears 1720 To describe his expectations for South Sea Company stock while it was still zooming in price — and before it became infamous as the disastrous South Sea Bubble.
The Pope’s flowery language and mythological references sound strained to 21st-century ears, but his core meaning is clear: “Let us fill the cup of the South Sea,” he wrote. “The gods will take care of our stock: Europa accepts the bull with delight, and Jove gladly unloads the bear.” In other words, let the good times roll!
But soon the bear won.
Jonathan Swift, Pope’s friend and fellow satirist, wrote of a “mighty bubble” later that year when South Sea stock collapsed, shattering the British economy and reducing the fortunes of thousands of foolish oxen – Not only Pope and Swift but also genius physicists, and inept investors, sir isaac newton,
Generation after generation continues to study this episode, although hordes of new investors learn these harsh lessons only through painful experience.
a sober solution
Save yourself some pain.
We are not about to get rid of the terms bull and bear. They are very deep rooted, very widely used and very convenient. But as far as categorizing and terming the stock market is concerned, there is a better way.
It is used by Howard Silverblatt. He is a senior index analyst at S&P Dow Jones Indices, which maintains and produces the two best-known US stock market indices – the S&P 500 and the Dow Jones Industrial Average.
Mr. Silverblatt, who has been in this business for more than 46 years, does not claim to provide “authoritative” definitions, but his position and experience make him as authoritative on the markets as anyone.
he calls the s&p 500 May be in a bull market, but until he declares it as a Afterwards The index matches its last peak on January 3, 2022, which was 4,796.56.
Until that happens, according to him and according to me, it’s still a bear market.
Note that this retrospective classification of the stock market is similar to that of the National Bureau of Economic Research for the economy. The NBER is the closest we have to an official arbiter of recession. It doesn’t declare a recession until one has started because it can’t be sure in real time about a system as complex as the US economy.
Are we in a recession now? There is a lot of data, but we don’t even know it. Nor does the Federal Reserve. Yet it must decide anyway, since it sets interest rates.
The labeling of recessions – and of bull and bear markets – is important for understanding what has already happened, but these labels are not helpful for acting now or preparing for the future.
an agnostic approach
Mr. Silverblatt’s definition of bull and bear markets leaves some room for doubt. But using his definition, even once a bull market is declared, it’s not clear how it should affect your investment portfolio.
Paradoxically, I’m not even sure I hope we’re in a bull market.
This is because I want to continue investing for years to come. If the market goes up, let’s say, another 10 percent over the next month, putting us squarely in bull market territory by any definition, then I’ll be even richer. But say the market falls 30 percent in August — and stays lower for years.
In that case, the recent bull market announcements will be bitter memories, if they are even remembered. It is always better to buy shares cheap and sell them high. Last year, when prices were 20 percent lower than they are now, was an excellent time to buy the stock. Now? It is not as good as it was then, even though the market is growing now.
Fortunately, long-term investors don’t need to time the market.
Instead of focusing on where stocks are going over the summer, consider that over a period of 20 years or more, the stock market has always gone up. But remember that it often drops sharply from time to time during those periods.
I try to square that circle by always getting excited about investing for the long term and nervous about what might happen in the next week or month or year.
Are we in a bull or bear market now? It doesn’t really matter.
I would just try not to get swept up in massive hysteria when the market is rising, or shut down completely when it is falling. Bubbles can be a personal disaster. But stable diversified investing has been successful for centuries through bull markets and bear markets.
