The stock market is crashing, and investors are faced with the tough question: “Will this rally continue?”
The S&P 500 index is up for five straight weeks, its longest winning streak since the fall of 2021.
The growth is noteworthy after the Federal Reserve’s bold actions to curb historically high inflation. Many investors feared the Fed’s series of rate hikes could push the country into a deeper recession. But the S&P 500 is up about 17% from a year ago, about 24% above its October low, and just 8% off the record.
Some investors have even dubbed the move the beginning of a new bull market, a booming period marked by a 20 percent rise from recent lows, according to one definition. Bulls say stocks tend to continue rising once they cross this threshold.
Some have warned that the recent rally could be a bear market rally, a brief moment of optimism in a long-running downtrend.
In a bull market
Bulls are basing their arguments on economic resilience, cooling inflation and signs that the Fed rate hike cycle is coming to an end.
unemployment is low, consumers are spendingAs a result, corporate profits performed better than expected. Inflation has slowed and the Fed chose to keep rates unchanged at its meeting this week for the first time in over a year.
Analysts at Bank of America recently declared that “the bear market is officially over,” and historically the S&P 500 has risen 20% from its lows, followed by frequent gains over the next 12 months. It pointed out. Data going back to the 1950s show that the index rose another 19% on average during that period.
Bank of America analysts say the fear of missing out on huge gains as stocks continue to rally could lure on the sidelines back into the market and prolong the rally. said.
Analysts at Goldman Sachs last week raised their year-end forecasts for the S&P 500, expecting the index to rise another 5% from last Friday’s level. The index was already up 3% at the end of Thursday.
One common criticism of this year’s rally in the S&P 500 index is that it’s largely due to the surge of several big tech companies, including chip maker Nvidia’s 200% gain. The average S&P 500 stock is up just 7% this year, about half the level of the overall index.
But the broader bull market is starting to take hold. The Russell 2000 index, which tracks the performance of small businesses that are more vulnerable to the ups and downs of the domestic economy, rose 8% in June alone.
why don’t bears look like that
The bears are focusing on roadblocks ahead. While inflation has declined, it remains at historically high levels, cracking some key parts of the market.
The collapse of three medium-sized banks in the spring has made other financial institutions more cautious, restricting credit and restricting the supply of cash to businesses and consumers.
“I think there is a weaker spot,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research.
Corporate bankruptcies are on the rise, and some investors say this is just the beginning of more serious problems as low-interest debts are coming due and borrowers face much higher refinancing costs. I’m afraid not. This is of particular concern for the commercial real estate market.
Consumer savings are starting to dwindle, and credit card balances are rising.
While bulls believe the Fed is nearing the end of its war on inflation, bears fear the final battle has yet to begin. Inflation is still more than double the Fed’s 2% target rate and could remain high. As such, the Fed could raise interest rates and even definitively keep rates high for an extended period of time, putting further pressure on the economy.
Equity markets flinched this week when Fed officials unexpectedly predicted another two-quarter point rate hike by the end of the year. But such predictions have failed before. Investors quickly ignored them and stocks resumed their rally.
George Goncalves, head of US macro strategy at MUFG Securities, thinks that’s a mistake.
“The signals the Fed is making and the fact that it’s committed to high interest rates means it’s unlikely we won’t see other risks surface and collapse along the way,” he said. there is,” he said.
