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The news this week has been absolutely dominated by coverage of Donald Trump being officially charged by the Department of Justice over that whole classified documents thing, but while that whole media circus was happening, it buried a far more interesting (to me, at least) story in the back pages. Namely…
Wall Street is feeling bullish again.
The S&P 500 rallied Thursday to end the day in a bull market, marking a 20% surge since its most recent low, reached on October 12, 2022. That brings to end the bear market that began in January 2022.It’s official. We’re in a bull market. CNN
Huh? Wha? I thought we were supposed to be entering a recession! What the heck happened?
The Year of the Question Mark
2023 has been the year that nobody seems to be able predict with any degree of accuracy.
Remember, we started 2023 with every major media outlet predicting a recession. Maybe it would be a major one, maybe a shallow one, maybe at the beginning of the year, maybe near the middle, but the question was never if, it was when and how bad.
I struggle to recall a year when literally every economist agreed on the same thing. The pretty steady drumbeat of bad news seemed to confirm what we were all thinking. Interest rates had risen faster than at any other time in history, the tech sector was laying off workers, and then mid-sized banks started falling over. First Silicon Valley Bank, then Signature, then First Republic. And then, as if all that wasn’t enough on our plate, the US looked like it was headed into another self-inflicted financial crisis, this time in the form of a debt ceiling debacle that almost caused a first-ever default by the US government.
So many signs were pointing to rough times ahead, and yet through it all, jobs kept getting created both in the US and in Canada. The latest US employment data showed the US creating 339,000 jobs for the month of May, easily beating economist’s expectations of 190,000.
Payrolls in the public and private sector increased by 339,000 for the month, better than the 190,000 Dow Jones estimate and marking the 29th straight month of positive job growth.Payrolls rose 339,000 in May, much better than expected in resilient labor market, CNBC.com
While this result came as a shock to most of the talking heads in the media, I’m not totally surprised personally. Since we’ve been investing, we’ve gone through a number of economic expansions and contractions, and while every recession is different, the one common factor about recessions is this:
Nobody seems them coming.
Recessions tend to come from sharp over-reactions to unexpected events. The last recession (2020) happened because of the pandemic. The one before that (2008) was due to the housing crisis. And the one before that (2000) was due to the dot-com bubble bursting.
So when every market prognosticator agrees on the future direction of the stock market, it tends to go in the opposite direction. Remember the long-awaited “Roaring 20’s” rally that was supposed to happen when the pandemic was over in 2021? Whatever happened to that?
There’s actually a Wall Street saying that describes this. It goes “Bull markets climb a wall of worry.” Meaning that bull markets tend to form when everyone’s worried that a crash is around the corner, not when everyone’s hopeful and optimistic. And boy is everyone still worried. I mean check this out…
The Yield Curve
This is how yield curves are supposed to look.
This is a chart of all the different interest rates the central bank is offering for lending it money in the form of bonds for a certain amount of time. Under normal, expansionary times, the line looks like the blue one. Money that you store in a short-term savings vehicle, like a savings account, pays relatively low interest. But if you’re willing to lock in your money for a certain amount of time, you can buy a bond with that duration and it would pay you a higher amount of interest to compensate you.
This is today’s US treasury yield curve.
It’s looking extremely inverted. Inexplicably, you can get a pretty decent interest rate above 5% to lend the government money for 1 month, yet a 5 year bond pays less than that.
That doesn’t make sense, and that’s why these shapes are abnormal right now. These things happen when there’s widespread expectation of a recession (like right now). Money floods into the bond market because people are scared and bonds are seen as a safe investment during scary times, but this keeps bond prices artificially high, which creates these distortions in the yield curve.
So here we are in a strange situation where economic indicators are pointing in different directions. Stock markets are up, yet the bond market is still predicting an imminent recession. Which is correct?
Facts vs. Expectations
I think this is a classic “wall of worry” scenario.
Naysayers will point to things that are “different” about this bull market, namely the fact that this advance is relatively narrow and concentrated in the mega-cap tech stocks like Meta, Apple, Amazon, and other companies who are benefitting from big bets on AI. And overall, people are still feeling pretty glum about the economy in general if you due to persistently high inflation, but actual metrics of economic performance paradoxically indicate that we’re in an expansion, not a contraction.
The stock market, which is typically a leading indicator of the direction of the economy, looks positive. GDP, which is a current indicator, is currently positive, having increased in Q1 by an annualized 1.3 percent. And as mentioned earlier, hiring (which is typically a lagging indicator) continues to be stronger than anyone anticipated, with unemployment still hovering below 4%.
It’s actually pretty rare for all 3 indicators to line up at the same time. Combine that with the news that the debt ceiling crisis got resolved without the US going into a catastrophic default, and I’m more inclined to believe that this bull market has legs.
Return of the Bulls
If this bull market sticks around, that’s welcome news for the FIRE community. After a pretty crummy 2022, stock investors around the world can look forward to some recovery. And even though the S&P 500 is still a ways off from its previous peak which was hit in January 2022, if you were investing throughout last year as stocks were selling off, you were picking up units on sale. That means you’ll be able to ride the recovery up faster than when it went down, which is how we pulled ourselves out of the Great Financial Crisis in 2008/2009.
The average bull market on the S&P 500 lasts about 5 years, and gain, on average, 177.8% cumulatively during that period. Even the shortest bull market, in 1932, lasted 98 days (source: nerdiness), and it still gained 111%.
Does that mean the S&P 500 will go up straight up over the next 5 years? Of course not. The stock market, whether it’s in bull or bear mode, will always be unpredictable in the short term. But again, if this bull market sticks around, index investors like all of us should be in for an interesting ride.
To those just starting out in investing, this might seem a little crazy. How can stock markets be doing well when all this bad stuff is going on in the news? But to more seasoned investors, this is actually par for the course.
The stock market exists in two extremes:
- Everything’s about to crash, you’d be an idiot to invest now
- Everything’s way too expensive, you’d be an idiot to invest now
That’s why you can’t rely on the news to figure out when would be a good time to invest. It’s never going to “feel” like a good time to invest. That’s why the only way to to do it is to invest when you have the money, and do it automatically so you don’t get freaked out by day-to-day market gyrations.
After all, the people who are best positioned to benefit from the bull market that’s emerged are the ones that put money into the markets during 2021, when it felt like that was setting your cash on fire. That’s how it always goes.
It never feels like a good time to invest, until it is.
So what do you think? Do you think this bull market is a turning point in the economy, or is it all a fake-out with more pain coming ahead? Let’s hear it in the comments below!
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