Blog
Article
Author(s):
Remarkably, the bull market has kept running strong amid sustained high rates.
Many individual investors may be tired of hearing about the persistent strength of the current bull market, perhaps thinking that such powerful characterizations may be exaggerated.
Yet, if anything, this bull’s power has been understated.
It has a singular historical distinction that hasn’t been widely acknowledged: It’s the first bull since World War II to arise in a Federal Reserve interest rate-hiking cycle. And, just as amazingly, it has kept running strong amid sustained high rates.
Typically, rising rates dampen business activity and hamper economic growth, with a negative impact on the stock market.
Unfettered by an albatross
A bull market’s beginning in this kind of economic environment is like a running back in training running downfield while pulling a massive tractor tire; it requires tremendous strength and endurance.
The bull market’s strength, despite this handicap, is among the distinctions pointed out by Jim Paulsen of the research firm Leuthold Group.
And although this bovine is now two years old, there’s a good chance that the coming Fed interest rate-cutting cycle, among other factors, will soon make it “new” again, says Paulsen, author of the Substack blog “Paulsen’s Perspectives.”
This bull has been dominated by the performance of big tech companies driving the S&P 500, known as the Magnificent Seven — Microsoft, Apple, Alphabet, Amazon, Nvidia, Meta and Tesla. Throughout this bull, the performance of most of the other 493 member companies of the index has been muted, if not lackluster or poor.
Paulsen, along with various market analysts, projects 2025 as a year of broadening market performance, with significant gains among non-tech stocks. Paulsen believes this broadening will not only sustain the bull market, but also give it a patina of newness — an almost calf-like quality. By late August, there were signs that this broadening was already taking hold in several sectors.
Middle-aged bull
Not that this bull really needs reinvigorating, as it’s by no means old, historically speaking.
According to data from First Trust, the average bull market since 1942 has lasted 4.3 years, with an average cumulative total return of 149%, as measured by the S&P 500. (The average bear market in this modern period has lasted 11.1 months, with a cumulative loss of -31.7%.)
So, at its current age of 24 months, the current bull is still four months short of the historical average mid-point.
Moreover, this middle-aged bull is in good physical shape. It convincingly demonstrated its strength and resilience in August, after the market experienced a sharp pullback.
From its peak in July to a trough in August (after precipitous sessions Aug. 2 and Aug. 5), the S&P 500 fell nearly 10%. But as of Aug. 22, the index had rebounded to within one percentage point of an all-time high.
The steep drop in early August was triggered by sudden highly contagious yet unfounded fears of recession and evanescent issues in the Japanese market. But the underlying cause was probably a belief that the market had become frothy — a bit overvalued — particularly among big tech stocks.
The market always overreacts, either greedily or fearfully, pushing prices up or down, but it usually settles back into an equilibrium before rising again more gradually in continuing bull markets. The market nearly always takes the stairs up and the elevator down.
Hence, psychologically enduring stock-price whiplash is an essential part of being a stock investor. Intelligent investors use these events for profit; many profited this time around by buying on the dip.
Given the halting nature of bull market growth — three steps forward and one back — even strong bulls periodically slow down a bit or take a brief breather now and then (a pullback or even a correction), catching their snorting breath before finishing their runs.
Election fixation
Currently, bullish sentiment among investors is generally quite strong. Often, when this sentiment among individual investors reaches such high levels, the market soon declines somewhat.
One reason for this is that many professional investors actually base their moves in part on what individual investors are thinking: They bet in the opposite direction. If popular investor sentiment is highly positive for a long enough period, goes the logic, then this sentiment has probably elevated prices above realistic levels.
Moreover, long-term market history indicates the chances of pullbacks this fall are pretty good, as this is a presidential election year. As of this writing in early September, the market had again fallen sharply, probably preceding another rebound — all amounting to typical pre-election volatility.
On average, in election years since 1928, the S&P 500, presumably reflecting investors’ concern about the election’s outcome, has sold off in September or October, with the S&P 500 declining significantly.
But then in November and December, the index has on average rebounded nicely. The motivations behind the rebound may seem nonsensical, as the president-elect isn’t inaugurated until January 20.
This might be explained by the axiom that the market dislikes uncertainty. When an election is over, so is the uncertainty surrounding its outcome, though the uncertainty about what the president-elect may actually do, of course, remains until he or she takes office. Yet no wise investor ever said the market always makes sense.
Regarding political parties, the market’s obsession with who will be president is historically groundless. Since the early 1960s, the market hasn’t done any better or worse with either party in the White House. Democratic and Republican presidents have had good and poor markets pretty much equally.
Combined drivers
If this bull market is interrupted by the election, it should be able to resume its run, driven by structural and economic factors that remain in force.
These factors include strong corporate earnings and continued high economic productivity. Market economist Ed Yardeni calls productivity the economy’s secret sauce because it reduces the tendency for strong growth to fuel inflation. When inflation declines — as it’s doing now, having recently fallen to about 2.9% from a 41-year high of more than 7% in 2022 — this encourages the Fed to keep interest rates low, generally benefiting stocks.
Regardless of how well the other 10 sectors perform next year, it’s hard to imagine that this would come at the expense of growth in the tech sector, as we’re still in the more-than-30-year-old digital industrial revolution. The latest phase of this revolution is the development of generative artificial intelligence technology.
While continuing as a strong driver, tech is likely to combine with broadening performance to sustain or even increase bull market strength, propelling it through next year and probably longer.
Along the way, there will be more pullbacks. No bull market has ever completed its run without some rest.
Stock investing is like hiking through a mountain range. To reach high peaks, investors must go through some valleys. But over time, with commitment and a sound portfolio, investors can reach increasingly higher summits.
Dave Sheaff Gilreath, CFP,® is a founder and chief investment officer of Sheaff Brock Investment Advisors, a firm serving individual investors, and Innovative Portfolios,® an institutional money management firm. Based in Indianapolis, the firms were managing assets of about $1.4 billion as of June 30.
Investments mentioned in this article may be held by those firms or affiliates,Innovative Portfolios’ ETFs, or related persons.