The bottom of the 2022 bear market happened in mid-October when the market was down 25% on a year-to-date basis, but we’ve come a long way since then.
The bottom of the 2022 bear market happened in mid-October when the market was down 25% on a year-to-date basis, and it was the second time the market hit a 25% dip last year, which is actually better than the average bear market loss of 34%. There has been upward momentum since then, and Jay Pluimer discusses the specifics in this optimistic episode.
Transcript:
Hi everyone, Jay Pluimer here with Flourish Insights. As the director of investments at Flourish Wealth Management, I take pride in providing our clients, colleagues, and friends with resources and information that can help them make strategic and effective choices regarding their investments. If you’ve been enjoying the show, be sure to subscribe on Apple, Spotify, Google, or wherever you get your podcasts, so you’ll never miss an episode.
Today, we are discussing what measures are used to determine that The 2022 Bear Market is Over.
The technical definition of a Bear Market for Stocks is a loss of 20% or more, while the definition of a Bull Market for Stocks is a gain of 20% or more. Because bear markets frequently decline by more than 20%, the technical end of a bear market frequently happens before the market has made a full recovery. In addition, the math of bear and bull market cycles don’t equate to a full recovery. For example, a market starting at $100 with a 20% drop will have a value of $80, but a gain of 20% from $80 results in a value of $96 which meets the bull market recovery but doesn’t mean the investor has made all of their money back.
The bottom of the 2022 bear market happened in mid-October when the market was down 25% on a year-to-date basis. That was the second time the market hit a 25% dip last year, which is actually better than the average bear market loss of 34%. There was a mini-rally for stocks in the latter part of the year as the S&P 500 Index ended with a loss of 19%. The market has continued to gain ground over the first 5-plus months of 2023, leading to a 20% gain from the mid-October 2022 bottom and the official end of the 2022 bear market.
There have been a few different factors supporting the stock market recovery, some of which are more favorable than others. The least positive aspect of the 2023 recovery is the dominance of Big Tech stocks, particularly stocks like Nvidia and Apple with large exposure to Artificial Intelligence. This has led to what’s called a narrow or shallow recovery because a small number of stocks have driven the market to a 20% recovery, meaning that a large number of companies have not made meaningful progress to recoup their losses from 2022.
You may recall references to so-called FAANG stocks which referred to Facebook, Apple, Amazon, Netflix and Google, the Big Tech stocks that drove market performance for most of the 2010s. According to Goldman Sachs, the new acronym for Big Tech is MAGMA which stands for Meta (the new brand of Facebook), Amazon, Google, Microsoft, and Apple. These 5 stocks currently represent 24% of the S&P 500 Index and have represented an outsized percentage of stock market returns in 2023. For example, MAGMA stocks are up 42% year-to-date while the other 495 stocks in the Index are up a combined 2%. This lack of market depth is definitely a concern and will play a big role in determining whether or not the new bull market will be able to sustain itself.
The other key drivers of the stock market recovery reflect optimism that (1) we are getting closer to the end of high inflation and that (2) the Federal Reserve will begin to cut interest rates at some point in 2023 or early 2024. We think the market might be early in the expectations for Fed rate cuts and that there is actually a good chance that there is at least one more rate hike before the end of the year, but we are more optimistic about the downward trend for inflation rates. The most recent Consumer Price Index or CPI data from April reflected an inflation rate of 5%, down significantly from the 2022 high of 9% but with room for additional progress toward the 2% target inflation rate.
The 2022 bear market was the longest since the 1940s, lasting 14 months compared to the average duration of 12-months, while the 25% drop was below the bear market average of 34%. I won’t miss the bear market but I’m not exactly rushing into the arms of the new bull market because it would be helpful to see more stocks participating in the recovery with a more definitive timeline for when the Fed will start to cut rates. In fact, we expect to experience a fair amount of stock market volatility over the next 3 to 6 months while we get clarity about progress for lowering inflation and whether or not the US will be able to avoid a recession. There could also be market swings if the Fed hikes interest rates or takes longer to begin cutting rates than market participants think currently. So although it’s important to note the end of a bear market, we are balancing acknowledgment of the market transition with patience for a more sustained recovery.
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