What does the S&P 500 being in a bull market mean for investors?

Understanding Bull Markets and their Implications

Introduction

The S&P 500 has officially entered a bull market phase, rising 20% or more from its most recent low. This has sparked many questions about what bull markets are, how long they last, and their implications for investors. In this article, we will explore these questions and others to provide insights and context for investors.

What is a Bull Market?

A bull market refers to a sustained period of rising stock prices, often marked by a 20% increase or more from the most recent low. The term “bull market” is derived from the behavior of bulls who charge with their horns, representing a market that is charging upwards. In contrast, a bear market is defined as a period of sustained falling stock prices, signifying a market that is retreating.

The Current Bull Market and its Drivers

The latest bull market is considered to have started on Oct. 13, 2022, a day after the S&P 500 closed at its most recent low of 3,577.03. Nonetheless, this bull market is facing significant headwinds due to price level concerns and stubborn inflation, but the main driver behind the present bull market is the economy’s resilience. Despite inflation being a pressing concern, the job market has been remarkably robust, which has allowed the economy to remain afloat, defying dire predictions from several quarters. The hope is that the US Federal Reserve will soon stop hiking interest rates and that persistent inflation could upend that.

How Long do Bull Markets Last?

On average, bull markets last over four years, with gains of nearly 178% over this period. The longest bull market ran from March 2009 to February 2020 and lasted roughly eleven years. Nonetheless, it is not unheard of for a bull market to last less than two years, as the previous one did that ended in March 2020, at the onset of the COVID-19 pandemic.

Implications of the Bull Market

One implication of the present bull market is that it favors a few companies, specifically Apple, Microsoft, and Alphabet, which account for much of the increase in the S&P 500. Critics have argued that this framework is inherently unstable, with too much power concentrated in a small group of firms. Another consideration is that the bull market tends to reward investors who buy and hold their positions, essentially providing outsized returns in comparison to other investing strategies.

Conclusion and Advice

In conclusion, bull markets offer opportunities to investors to reap the rewards of higher stock prices and profits. However, this should not come without the requisite caution, given the possibility of downside risks. Investors should remain vigilant and informed, closely monitoring the market and economic indicators, and seek expert advice on their investment strategies accordingly. Importantly, investors must remain diversified, reducing their risk exposure by establishing portfolios that span different asset classes. In this way, investors can manage risk and capture opportunities in these dynamic market conditions.