Stock Market Insights: Most Hated Bull Market Ever?

Almost every year that the S&P500 has gained the last 14 years, I recall hearing from many in the financial media that “this is the most hated bull market ever”.   And every year until now, I’ve disagreed with these calls.  Until now. Why now? Well, those who have grown to know our team over the last 6 years of growth at Oak Harvest, should have come to know we like to stick to the data if we can. Folks the data says. Yes, this is one of the most hated bull markets in the last 40+ years.

First off, thinking back to the doomer calls in late 2022 and late 2023? What do you remember? What I recall is in the second half of 2022 it was calls for continued rampant inflation, the doomers calling it hyperinflation like Germany in post WW2, to crater the USA economy and the stock markets even beyond the notable recession and stock market selloff investors were put through during the 1h2022.

Hold on a second Chris you said recession in 2022? Yes, I did.  Just like I did back then. Come on we did not have a recession Chris, the NBER never declared a recession you might argue.  True, but as we have discussed for the better part of 6 years waiting around for lagging, inaccurate and falsely precise government data is not the way to run your investment portfolio or if you are a macro trading, trade profitably. If you want to wade through the increasingly nebulous NBER definition here is the link. https://www.nber.org/research/business-cycle-dating#:~:text=The%20NBER’s%20definition%20emphasizes%20that,and%20duration%E2%80%94as%20somewhat%20interchangeable.

The short version summary is, their definition has somehow morphed into a nebulous handwaving academic and political exercises in my opinion.  Here is what they say in a brief sentence, “The NBER’s definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. In our interpretation of this definition, we treat the three criteria—depth, diffusion, and duration—as interchangeable.”

When I was learning the money management business, I was taught a rather precise and narrow definition of a recession. That definition, which the markets seem to stick with more than the academics at the NBER? Two consecutive quarters of negative real GDP growth. As an investor we are concerned about what this means for stocks and our investments. Historically speaking recessions have led to average real declines in stocks of -30-35%, with the average recession return I’ve seen quoted is -32%.

What happened in the 1h2022 in the economy? The USA economy as measured by real GDP shrank by -1.6% in the 1q22 and -9% in the 2q222. As I said back then, that’s a recession.  Of course, those politicians in DC running the White House at the time reverently disagreed with this assessment including Treasury Secretary Janet Yellen noting in several TV appearances while two consecutive quarters of negative growth is generally considered a recession, conditions in the economy were unique. Her quote, when you’re creating almost 400,000 jobs a month, which is not a recession,” she said.

What was going on at this time? Yep, the midterm elections were approaching, and the White House was very aware of the optics of a country in recession, where Americans are struggling financially. With the cost of so many things skyrocketing and inflation running at a multi-decade high, a lot of Americans are already taking it on the chin. There was no way that they would admit to penciling in a recession in 2022.

But do investors care about the opinions of politicians and public servants? Or do they care about earnings, earnings growth rates and interest rates? Well, you should know the answer to that one if you have been investing for more than a few years.  Here’s a great chart of quarterly EPS of the SP500 in 2022 through 1q2024 from earnings insight. .  one can see earnings fell QTQ from the 2q2022 through 4q2022 and even declined YTY from 1q22 to 1q23. Here’s a second chart on SP500 earnings growth rates in 2022 from Lipper.

chart on SP500 earnings growth rates in 2022 from Lipper.

The economy shrunk in the 1h2022 on a real GDP basis and earnings growth on the S&P500 went from +15% to start the year to almost -10% YTY to end 2022 and what happened to the overall S&P500 during this period? Yep, you guessed it it declined hard. Here’s a 10-year chart of the S&P 500 during the ongoing secular bull market.  Up and to the right in a channel. I stripped out the overshoot in late 2021 and the undershoot during the Covid crash, but this is the secular trend so far.

10-year chart of the S&P 500 during the ongoing secular bull market

Ass you can see, during the short recession in the first half of 2022 the S&P500 declined peak to trough around -27.5% in nominal terms and with inflation running 5-9% in the 1h2022 your purchasing power or real return loss with inflation was between -32.5% and say -37.5%. Guess what? Those are recession declines.  The markets are smart.  Of course, as and near the lows the doomers were out in mass calling for more down and crashes which didn’t happen in retrospect.

Many investors who panicked out back then have now gotten back in because 1- shorter term interest rates have risen, and they feel “fine” with a lot of their money earning about 5% relatively risk free. This is the “cash on the sidelines” many bullish strategists make. Here is a chart from BAC on money market fund holdings. Over $6 trillion and counting.

Chart from BAC on money market fund holdings.

That doesn’t scream to me rampant speculation is taking place.

For the better part of 2023 and 1h 2024, the drumbeat by naysayers on the US stock markets was that “it was only a few stocks driving the markets” which factually was correct given the way the S&P500 is weighted and that was used to discourage those who sold during Covid or near the lows in October 2022 or October 2023 from investing.  While that was true, it’s also true that during that time period the S&P500 gained about +45% into Tax week this year and +55% from its October 2022 low until around July 4th of this year.  Just because is was mainly 7 stocks pushing the S&P 500 higher, does that mean that return doesn’t count?  And what about since then now that the breadth in the S&P500 is expanding, and the “other 493” S&P 500 stocks are starting to contribute to the markets gains?  According to Savita S. at BOA, the other 493 companies in the S&P500 index, ex the magnificent 7 are set to show their second consecutive quarter of earnings growth since their earnings peaked in early 2022. Growing earnings? Lower trending or stable interest rates?  Those usually lead to higher stock prices.  No excuses necessary.

Finally a third reason I’ve heard for not investing and staying out of the markets, and missing the gains of the last 2-3 years are largely those surrounding emotions tied to political preferences.  I’ve heard “I’m waiting on the election” numerous times from investors with both party affiliations.  I’ve heard I’m expecting volatility and I’m waiting on that to dissipate.   I haven’t heard the conclusion though?  As if they will get back in the market if one party wins in November or sell everything if their candidate loses in the next few weeks?  I remind everyone that we had recessions and down markets under both Bush in 2000 and Obama in 2008.To be followed by almost 80% gains during Trumps first 3.5 years as well as near the exact same 80% gains under Biden election day until now? If that data doesn’t convince you that it’s the Fed and the economy not the president who influences your investment returns how about some more data that’s behind the scenes.

Looking at true measures of volatility.  Both realized volatility which is the squiggly lines that stocks make on a daily basis and implied volatility which is the math built into the options markets to hedge or speculate on future moves, I’ve noted the same thing since the year started.  What’s that?  It’s that almost everyone is already nervous and hedged with the same time frame insight.  They have been all year.  Here is a chart of the relative moves in realized volatility “RVOL” and the forward volatility future, continuous contract for about a week right in front of the presidential election. The October expiration which is the 16th.

Chart of the relative moves in relaized volailty “RVOL” and the forward volailty future, continous contract for about a week right in front of the presdeintial election

As one can see, realized volatility has increased since the beginning of the year, by about 25% in total but it has been declining since the mid summer spike.  On the other hand the continuous contract for October expiration (UXV4) has been nearly the identical price throughout the year.  As of this writing its priced around 19.255 and throughout the year any time it has risen to between 21-22, sellers of volatility come in and buyers of the S&P500 show up.  It happened on the early 1q24 pullback, again during the April decline, and in a big way during the Yen carry trade panic in early august.  Will it happen again and buyers “buy the dip” on any political panic or 3q earnings weakness in the overall market?  Our indicators continue to say, yes, it wont be different this time and regardless of what you heard on TV since late 2022 and again in 2023, it’s still a bull market, until it proves it isn’t.  And my opinion, one of the most hated bull market runs I’ve seen in my 35+ years in the business.

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https://www.rbcwealthmanagement.com/en-us/insights/the-push-and-the-pull-of-us-earnings