The S & P 500 has officially entered a bull market, indicating the potential for further gains in the broader index, according to CFRA Research. Last week, the broad market index surpassed its previous record high from January 2022, recovering all its losses from the recent bear market. This achievement comes despite the rise in the 10-year Treasury yield and oil prices. CFRA’s chief investment strategist, Sam Stovall, believes that historically, this is a promising sign for equities. In his Monday note, Stovall suggests that investors should prepare for a “post-high five,” implying a possible advance of 5% before pausing to digest recent gains.
Stovall highlights the historical pattern of bear markets since World War II. He categorizes them into two types: “garden variety bears” and “megameltdowns.” The former refers to bear markets with declines ranging from 20% to 39.9%, while the latter represents declines of 40% or more. Out of the 14 bear markets that occurred, 11 were garden variety bears, whereas only three were megameltdowns. The most recent bear market falls into the garden variety category, lasting approximately 15 months from its October 2022 low and wiping off 25.4% of the S & P 500 value from peak to trough.
Irrespective of the type of bear market, once a bull run is confirmed, a post-high five move tends to take place. On average, the S & P 500 experienced a gain of 5% over the following two to two-and-a-half months. However, after this initial surge, the index has historically encountered a decline ranging from 6.8% to 8.7%, depending on the severity of the preceding bear market. Stovall emphasizes that although these subsequent declines varied in depth, none of them evolved into a new bear market.
While the S & P 500’s record high is a significant achievement, Stovall acknowledges the possibility of market consolidation shortly after reaching this milestone. He points out four instances in market history when equities pulled back within two weeks of a record. Moreover, for investors to have sustained confidence, the market’s gains must extend to other sectors. Stovall notes that the S & P MidCap 400, S & P SmallCap 600, and Russell 2000 are all more than 10% below their previous record highs. Therefore, a continued climb through January for these sectors would trigger a positive full-year expectation, thereby putting investors’ minds at ease.
As the S & P 500 remains in the bull market territory, investors eagerly await further gains. The recent achievement of surpassing the previous record high is a positive indicator, which has historically been associated with subsequent advances. While some market consolidation and sector extension could be anticipated, the overall trajectory appears optimistic. As investors navigate the ever-changing market landscape, keeping a close eye on the performance of various sectors will be crucial in determining the sustainability of this bull market.