It’s Too Soon to Say Whether This Is a Bull Market, but Invest Anyway

Headlines and market analysis in recent weeks that stocks are in a bull market may be reassuring, if misleading.

These are based on the solid fact that the S&P 500 is up more than 20% from its previous low on Oct. 12. Markets were weighed down by the news that the Federal Reserve expects to raise interest rates further this year. But if inflation, which surged at 4% a year in May, drops significantly, the Fed could keep rates on hold or even start cutting them, and stock markets could continue to rally.

But is this really a bull market? That may be the case eventually, but for now there are some big caveats.

First, if a bull market means that stocks are clearly trending upwards, then no, the bull market label is currently being misapplied. There is no telling what the market will look like next month or next year. Second, even retrospectively measuring the performance of the market, this designation of a bull market is premature and, as I will explain, uses a more rigorous definition, one that seems more sensible to me. I’m here.

An oft-repeated definition, which I consider oversimplistic and potentially dangerous, is that a bull market is one that has risen 20% from its previous low. (Using the same logic, a bear market is one that has fallen 20% from its previous peak.)

It sounds sometimes called “official” By definition, it’s not a big deal.

The main problem with this definition is that it seems to say something about where the market is going rather than what the market has been. If you’re losing money, it’s not a bull market. But investors who have been in the stock market since early last year are actually losing money.

Note that stocks must fall by at least 20% to be classified as a bear market. This means that a bull market requires a profit of at least $1. 25 percent To wipe out bear market losses. (Suppose he has $1,000 in the market and falls 20 percent to $800. To return to $1,000, he needs to rise 25 percent, or $200.)

For an investor like me who owns a broad market through low-cost index funds, a simple 20% definition means: lost money Since the peak of the market. To believe that this is a true bull market, we have to assume that it will continue to rise.It’s a magical idea, and for the Fed sign It intends to raise interest rates further, which is dangerous.

Wall Street makes money by being bullish. People make money by putting their savings into stocks. I’ve pointed out that Wall Street’s annual forecasts are often overly optimistic and therefore wildly inaccurate.

But after a bear market like 2022 when the market drops significantly, it’s often overly pessimistic. As of December 2022, Wall Street’s median forecast was for the S&P 500 to be 4,009 by the end of 2023, but the current market is well ahead of that. As is often the case in the middle of the year, when forecasts fall off the mark, investment firms belatedly raise their forecasts. Goldman Sachs said in a June 9 client memo that it had raised its year-end price target for the S&P 500 to 4,500 (from 4,000), which represents a 5% upside.

A further bullish correction by Wall Street firms is likely. But that doesn’t make much sense. Adjust your forecasts downward if the market crashes. The fact that the market has risen does not mean that it will continue to rise. Unless investors start believing it will go up and act on that bullish belief, pushing the market even higher. A bull market based on emotional enthusiasm, not backed by increasing profits, can easily turn into a bubble.

Bulls and bears, bubbles have been vague tropes for centuries. These brilliant but imprecise terms were popularized in the 18th century by great writers and poor financiers.

Poet, satirist, and ill-fated investor Alexander Pope said of bulls and bears: 1720 He spoke of his hopes for Nankai stock when it was still soaring and before it became infamous as the disastrous Nankai bubble.

The Pope’s references to the language of flowers and mythology may sound tense to 21st-century ears, but the Pope’s basic meaning is clear: “Now fill up the cup of the South Sea.” Pope wrote. “Our stock gods care. Europa gladly takes the bull, Jove gladly drives the bear away.” In other words, have a good time!

But the bear quickly won.

Pope’s friend and fellow satirist Jonathan Swift lamented the “powerful bubble” that later that year saw South Sea stocks crash, shattering the British economy and withering the fortunes of thousands of stupid bulls. Physicist, incompetent investor, Sir Isaac Newton.

This episode has been studied for generations, but many new investors learn these hard lessons only through painful experience.

Avoid some pain.

We are not going to get rid of the terms bullish and bearish. They are too deeply ingrained, too widely used, and too useful. But when it comes to classifying and periodizing the stock market, there is a better way.

Used by Howard Silverblatt. He is a Senior Index Analyst at S&P Dow Jones Indices, which maintains and creates his two most famous stock market indices in America, the S&P 500 and the Dow Jones Industrial Average.

Silverblatt, who has been in the industry for more than 46 years, does not claim to have put out an “official” definition, but his position and experience make him like everyone else in the market. It can be said that it is official.

he said the S&P 500 in May in a bull market, but he does not declare it to be a bull market rear This index coincides with the last peak of 4,796.56 on January 3, 2022.

Until that happens, according to his accounting and mine, this is still a bear market.

Note that this retrospective stock market classification is similar to what the National Economic Research Service does for economies. The NBER is the closest thing to an official arbiter of recession. Due to the lack of real-time certainty about a system as complex as the US economy, a recession is not declared until long after it has begun.

Are we in recession now? I have a lot of data, but I don’t even know it. So does the Federal Reserve. But since you set the interest rate, you have to make a decision anyway.

Labeling recessions, and bull and bear markets, is important in understanding what has already happened, but these labels do little to help us act now or prepare for the future.

Silverblatt’s definition of bull and bear markets is questionable. But using his definition, even if a bull market were declared, it’s not clear what impact it would have on investment portfolios.

Paradoxically, we don’t even know if we want to be in a bull market.

Because we plan to continue investing for years to come. If, say, the market rises another 10 percent next month, apparently entering bull market territory, I’ll be richer than I am now. But then let’s say the market drops 30% in August and stays low for years.

If so, the recent bull market announcement will be a bitter memory, even if you remember it. It’s always good to buy stocks cheap and sell them at a higher price. Last year was a great time to buy stocks when prices were 20% lower than they are today. now? The market is up now, but not as much as it was then.

Luckily, long-term investors don’t need to time the market.

Instead of focusing on where stocks go over the summer, consider that the stock market has been consistently rising over a period of more than 20 years. However, keep in mind that there are often sharp drops even within that period.

While I’m always bullish about long-term investments, I try to square that circle by worrying about what’s going to happen in the next week, month, or year.

Are we in a bull market or a bear market right now? It doesn’t really matter.

I want to try not to get caught up in the public frenzy when the market goes up, and to be totally reluctant when the market goes down. A bubble can be a personal disaster. But through bull and bear markets, stable diversification has been successful for centuries.

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