The S&P 500 has officially entered into a bull market, which suggests that the broader index may experience further upside in the near future, according to CFRA Research. Last week, the broad market index surpassed its previous record high from January 2022, recovering all the losses incurred during the recent bear market. This achievement is especially noteworthy considering the simultaneous rise in the 10-year Treasury yield and oil prices. Sam Stovall, CFRA’s chief investment strategist, believes that this historical performance bodes well for equities. While not an infallible guide, past data indicates that investors should anticipate a potential advance of 5% before a temporary pause to consolidate recent gains.
Examining post-high five movements, it becomes clear that they have consistently followed the confirmation of a bull run, regardless of the nature of the preceding bear market. Since World War II, there have been a total of 14 bear markets. Among these, 11 can be classified as “garden variety bears,” with declines ranging from 20% to 39.9%. The remaining three bear markets, on the other hand, qualify as “megameltdowns,” characterized by declines of 40% or more. The most recent bear market falls into the former category, lasting approximately 15 months from its October 2022 low and resulting in a 25.4% decline in the S&P 500’s value from peak to trough.
Even after confirming a bull run, the S&P 500 typically experiences an average gain of 5% over the subsequent two to two-and-a-half months. However, this is followed by a decline ranging between 6.8% and 8.7%, depending on the type of bear market that preceded the bull run. It is worth noting that despite occasional dips, none of these declines has spiraled into a new bear market. Nevertheless, it is important to recognize the possibility of consolidation occurring in the market shortly after reaching a record high.
To instill true confidence among investors, the S&P 500’s gains must extend beyond its own performance and encompass other sectors as well. According to Stovall, the S&P MidCap 400, S&P SmallCap 600, and Russell 2000 indices are all currently more than 10% below their previous record highs. For the market to continue climbing through January, triggering a positive full-year expectation, this trend must be reversed. Achieving this would alleviate the concerns of many investors and establish a more comprehensive and robust market rally.
The S&P 500’s entrance into a bull market represents a promising development for equities, potentially signaling further gains in the near term. Historical analysis indicates that a post-high five move is likely, where the index, on average, has gained 5% over the subsequent months. However, a subsequent temporary decline could occur, ranging between 6.8% and 8.7%, depending on the previous bear market’s intensity. It is crucial to bear in mind that these declines have not progressed into new bear markets. As the market progresses, it is essential for other sectors, such as the S&P MidCap 400, S&P SmallCap 600, and Russell 2000 indices, to follow suit and regain their previous record highs. By fostering a higher level of broad sector participation, the market can inspire greater confidence among investors, leading to a more sustainable and positive outlook for the year ahead.
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