This bull market is still young relative to history and, for now, supported by a healthy economy and broadening participation among stock sectors outside of tech.
The current bull market is two years old. The fears that higher interest rates would sink the economy and stock market proved unfounded. In fact, the Fed has apparently engineered the most difficult maneuver in monetary policy: the soft landing.
But while this may be a reason to celebrate, the focus has shifted to determining just how far this bull market may run.
One tricky thing about the current bull market is that it started from a place of relatively high valuations. In other words, stocks were not cheap when they started to rise in value a couple of years ago. And although earnings have rebounded nicely over the past couple of years, earnings have not risen faster than stock prices, resulting in even higher valuations. Consequently, it seems important that stock earnings continue their strong expansion in order to keep this bull market alive.
Market Breadth Improving
One aspect in which we had been waiting to see improvement, and now finally have, was the breadth of gains across sectors. In the first year of this bull market, participation was unimpressive and concentrated in two sectors: Information Technology and Communication Services. And in fact, two sectors (Consumer Staples and Utilities) were down in the first year.
While that underscores the relatively unhealthy nature of this bull market’s early days, more sectors have now joined the party. One of the most notable and impressive jumps has been for financials, which is trailing only tech over the past year.
The Bottom Line
The ripple effects of the pandemic are still lingering and are among the many reasons this cycle is not easily compared to others. History is consistent, however, with the notion that bull markets don’t tend to die of old age; they’re usually eliminated by something—not easy to anticipate in advance.
However, at least for now, nearly 80% of S&P 500 members are trading above their 200-day moving average, sector participation has increased markedly over the past year (i.e. More than just tech stocks are rising.), and monetary conditions are more favorable for stocks. That isn’t to say year three of the bull’s life will be without volatility. With valuations looking quite stretched and investor sentiment (specifically behavioral measures) on the more optimistic end of the spectrum, the market may be a bit more vulnerable to pullbacks in the face of any negative catalysts.