Are Strong 2023 Gains a New Bull or Just a Bear-Market Rally in Disguise?
Yesterday I reviewed numbers that show that the 2023 advance in the S&P 500 Index continues to post a high return when set against historical calendar-year results. Encouraging, but it’s still premature to dismiss the view that the market remains in a bear-market rally.
Let’s start with the current trend profile for the S&P 500. As the chart below reminds us, the market has enjoyed a strong bounce off of the previous low of a year ago. The rebound has stumbled lately and is testing the upside trend, inspiring fresh doubt about what happens next.
Despite the 14.0% year-to-date gain through Oct. 11, the S&P 500 has yet to fully recover from its steep loss in 2022. This is clear when we look at the S&P 500 through a drawdown lens. The current 8.7% peak-to-trough decline suggests that bear-market conditions still apply until the previous peak in January 2022 is regained and the market moves decisively above that point.
The recent rise in Treasury yields is a factor for expecting that stocks will face headwinds in the near term. The current yield for the 10-year Note is 4.58% (Oct. 11), which is close to a 16-year high. The long-term expected return for stocks is arguably higher, but the gap has surely closed by more than a trivial degree in recent weeks.
As investors weigh the risk-free return in government bonds against the higher but far more volatile and uncertain ex-ante performance in equities, the case has strengthened for trimming equity allocations.
The counterpoint favoring stocks is that the economy still looks set to post a faster pace of growth in the upcoming third-quarter GDP report while corporate earnings are on track to rebound.
Meanwhile, there’s fresh support for thinking that the end of the rate hikes by
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