Wall Street is excited again.
The S&P 500 ended the day in a bull market on Thursday, marking a 20% rally from its most recent low reached on October 12, 2022. This ends the bear market that started in January 2022.
The broad-based index closed at 4,293.93 and crossed the threshold that separates a bull market from a bear market, buoyed by gains in major tech stocks — investor talk for a period marked by rising stock prices and rising optimism on Wall Street. Investors are definitely in a buying mood: CNN Symbol of fear and greed Jupiter hit “Extremely Greedy”.
Markets have been surprisingly resilient over the past nine months, as 2022 losers like tech and media have bounced back from a disastrous year in hopes that the worst is over for those industries.
The AI boom has fueled interest in tech stocks, which dominate the S&P 500. After a terrible year for Big Tech, hope is back as ChatGPT makes AI it-ding in Silicon Valley. Investors are placing big bets on Google, Meta, Apple, Amazon, Nvidia and others, hoping they can create a new technological revolution with artificial intelligence.
Over the past week, markets have gained momentum as this closes Debt ceiling crisisThe Federal Reserve will hold off on rate hikes at its June meeting and is the latest strong string Economic metrics.
While all this is positive for the economy, analysts fear that this could be a short-term rally that will bite investors. Inflation is too high for comfort. The U.S. economy is still adding jobs, but the pace is often slow. Consumers are still spending, but they are pulling back on discretionary spending, focusing on necessities like clothing and food and leisure activities.
This is not a recipe for long-term market success.
“We’re very late in the economic cycle and it’s going to start slowly and head into a recession later this year,” Sameer Samana, senior global market strategist at Wells Fargo Investments, told CNN. “The key difference for us is that bull markets coincide with economic expansions, not economic contractions.”
However, since the last bull market, we have had a war in Europe, a banking crisis and a credit crunch among other dramas. Markets are in uncharted territory, and while a Wall Street boom could be the first recession to hit, “in this market, you never say never,” Samana said.
The current situation is a little more nuanced than the bull market-bear market binary, said Kevin Gordon, senior investment strategist at Schwab. What’s happening instead, he describes as a “goose market,” means that stocks are nice and quiet on the surface, but there’s a lot of paddling going on underneath.
He said tech and AI companies with mega-cap stocks are “solving” the market’s problems, while cyclical and small-cap companies are suffering.
The S&P 500 is market capitalized and top-heavy, meaning a handful of companies — mostly Big Tech — can lift the index even as most stocks struggle.
“Excitement around artificial intelligence, along with the U.S. dollar, has created extreme divergence and concentration risk in major stock indexes,” said Lisa Shalette, chief investment officer at Morgan Stanley Wealth Management. “Such narrowness does not build new bull markets.”
The bottom line: Investors should “avoid getting caught up in this as the new bull market,” Samana said. “Keep perspective on what this is, it’s a very shocking bear market rally.”
Investors should take advantage of this swing by trimming areas of their portfolios that are waiting to get rid of them, he said, as opposed to trying to chase the tech companies that have led this upward move.
Whether or not we’re in a bull market depends on the Federal Reserve’s interest rate policy decision next week, said Sam Stovall, chief investment strategist at CFRA.
He said that during 16 rate hike cycles since the Fed began announcing changes to the central bank funds rate in 1989, the Fed either avoided raising rates or stopped its rate hike program altogether.
The S&P 500 rose an average of 3.6% to gain 88% of its price after the Fed avoided or stopped hiking rates at a meeting.
“If the Fed were to avoid a hike in June, history suggests, but does not guarantee, that the market will be more upside-down,” he said.