It's been a strange, if not historically long, journey for stock market bulls, but after nearly two years, the S&P 500 is just a few points away from hitting record territory.
The S&P 500
SPX,
The U.S. large-cap benchmark rose 20.12 points, or 0.4%, to close Tuesday at 4,774.75. That leaves the index less than 0.5% from its record close at 4,796.56, set on January 3, 2022.
As of Tuesday, 497 trading days have passed since the S&P 500's last record close. It is the longest streak without a record since a drought of 1,375 trading days that stretched from October 9, 2007 to March 28, 2013, according to Dow Jones Market Data.
Stocks fell into a bear market last year when the Federal Reserve began aggressively raising interest rates in an effort to control inflation, which had been near a four-decade high. Stocks fell as Treasury yields, which move in the opposite direction to debt prices, rose in response to tighter monetary policy from the Federal Reserve. The bonds, by some measures, suffered its worst year on recordwhich is a rare double whammy for investors who typically see losses in stocks offset by gains in bonds or vice versa.
Stocks bottomed in October 2022, regaining some of the ground lost through the end of the year before entering 2023 with a rally as the Federal Reserve began to slow the pace of rate hikes. The S&P 500 broke out of its bear market in June, rising more than 20% from its bear market low set the previous October, before stumbling in late July.
That move met widely used criteria for the start of a new bull market, but some market observers argue that a return to all-time highs is needed to confirm that a new bull market is indeed underway.
If the S&P 500 returned to record territory soon, the nearly 24-month gap between records would be shorter than the average seen in the 14 bear markets since the end of World War II, according to Sam Stovall, chief investment strategist at CFRA. . On average, it took the S&P 500 37 months to fully recoup its losses following a bearish decline (see chart below).
CFR
What's strange about the rally? It's been very tight, with 2023 earnings dominated by the so-called Magnificent Seven cohort of mega-cap tech stocks, despite broader participation more recently. The S&P 500 is up 24.4% in 2023. Weighted by market capitalization, the index's gains have been driven primarily, but not exclusively, by the big tech names, a fact illustrated by an 11% gain in the year-to-date for an equally weighted measure of the S&P 500.
The Dow Jones Industrial Average
DJIA
reached a series of record closings this month. He closed Tuesday at 37,545.33, just a few points shy of his final record of 37,557.92, set on December 19. The top-line indicator is up 13.3% so far in 2023.
See: The 'Magnificent Seven' dominated 2023. Will the rest of the stock market soar in 2024?
The S&P 500's narrowly led rally marks an atypical start to a bull market. That, at times, has led operators and technicians to doubt the staying power of the rebound.
A close at a new record for the S&P 500 will likely provide bulls with limited comfort. Stovall noted that after recovering its losses in the bear market, the S&P 500 rose 5.2% on average over the next 2.4 months before falling prey to another decline of 5% or more, averaging 8, 2%.
"The good news is that after the S&P 500 regained everything it lost in the previous bear market, none of the subsequent declines became a new bear market," he said.
There's no guarantee that history will repeat itself, but based on averages, the S&P 500 would rise an additional 5% from its new all-time high before suffering another drop of more than 5%.
“The bad news, however, is that this [post-all-time high] The rally could be very short-lived as four times the market stumbled almost immediately after recovering its previous bear market loss,” he said.
