A New Bull Market and the August Doldrums

A New Bull Market and the August Doldrums

August 23, 2023

What is a bull market? And who determines if we are in one?

Technically speaking, a bull market is defined as a 20% gain in a stock market index, such as the Standard & Poor's 500, from a closing low.

So, are we in one? Yes, the bulls have been running again!

The S&P 500 hit a closing low of 3,577 on October 12, 2022. A 20% gain from there would put the S&P 500 at right about 4,292. As you can see from the accompanying chart, the S&P 500 eclipsed that level and, as of July 31st, has seen a (price only) rally of 28%.

Source: YCharts, date from 1/1/2022 to 7/31/2023

The chart also shows how challenging the stock market has been since the start of 2022. It’s easy to understand that it’s been a difficult period to remain focused as an investor.

It’s also a period that reminds us how important it is to “tune out the noise” and focus on what you can control, like your time horizon, risk tolerance, and goals.

Through 7/31/2023, the S&P 500 is leading the way among the major asset classes year-to-date, as you can see in the chart below:


The majority of S&P 500 gains this year have come from growth stocks (companies that are generally reinvesting profits into growing future revenue and earnings) including what is being dubbed the “Magnificent Seven” – Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta.

Much of this growth stock rally is being attributed to the Artificial Intelligence boom. Many tech-based companies are benefiting from forward-looking (perhaps speculative) future earnings expectations.

So far this year, value stocks (established companies that trade at attractive prices relative to earnings, sales, or dividends) have lagged the broader market. “Reasonably” priced companies have performed ok but have lagged their growth cousins.


Source: Morningstar Direct

The bond side of a diversified portfolio is still having a rough slog. The US Aggregate Bond Index has gained back just of bit of last year’s downturn, and patience will be required here.

But unlike in previous years, bond investors are being paid a reasonable income to wait for bond prices to go up. The yield on the US Agg was 1.77% at the beginning of 2022, compared to around 3%. Bond prices should rebound when there are clearer signs the Fed is done hiking and/or recession fears become warranted, and the Fed begins cutting rates.

The Fed and Inflation

Speaking of the Fed…the rate of inflation has been on a steady decline since peaking at 9% in June of 2022. The most recent inflation data for July came in at 3.2%, which was lower than expected.

The Fed Futures market is now pricing in an 80% chance the Fed will leave rates unchanged at 5.25-5.50% in their September meeting. And there’s currently a 70% chance rates will remain unchanged in November.

Source: CME Group, FedWatch Tool, data as of 8/10/2023.

August Seasonality

It’s normal for stocks to take a breather after a nice run. Afterall, even bulls need to stop and rest sometimes. So far in August (as of August 10th), S&P 500 is down about 2.5%.

Historically, August has been a volatile month for a simple reason: many people are on vacation. The running joke is that all the big Wall Street traders are in the Hamptons, leaving the interns behind to run the trading desk.

And when people are out of the office, the financial markets often see a lower volume of shares traded, which can cause big price swings following news events.

Source: Investing.com July 28th, 2023

Volatility this month can also be attributed to what we saw through most of the 2010s: “Good news is bad news.”

Good news: Q2 S&P 500 company earnings have surpassed expectations.

Source: Helios Quantitative Research, Bloomberg. Latest available as of 8/15/2023 with 457 companies within the S&P 500 having reported earnings.

Why this is bad news: The consumer is strong, the labor market is strong, and the Fed may need to keep rates higher for longer or even raise further to slow things down.

Good news: US Gross Domestic Product for Q2 came in above expectations at 2.4%. The recession economists expected in the first half of 2023 didn’t materialize. In fact, growth in the US economy is accelerating, with the Atlanta Fed’s GDP tracker currently expecting GDP growth of 5.8% for Q3!

Why is this bad news: The consumer is strong, the labor market is strong, and the Fed may need to keep rates higher for longer or even raise further to slow things down.

This dynamic has also affected bond markets. The Bloomberg Aggregate Bond index is down close 1.5% this month.

So, how will the rest of 2023 shape up? Will the bulls keep running? You can probably guess my answer by now: no one knows.

But if I’ve learned anything over 25 years, it’s that good news ultimately moves markets higher, even when they don’t in the short-term.

My recommendation is to enjoy the last few weeks of summer.

Feel confident that we are here, monitoring the data and updating your portfolios accordingly. If we can be of any help, please reach out.

Happy planning,