The headlines and market analysis of the last few weeks suggesting that stocks are in a bull market may be reassuring, even if they can be misleading.
They’re based on the undeniable fact that the S&P 500 is up more than 20 percent since its last bottom on Oct. 12. News that the Federal Reserve expects further rate hikes this year weighed on the market. However, if inflation, which rose at an annual rate of 4 percent in May, falls significantly, the Fed could hold interest rates steady or even start cutting them – and the stock market could well continue to rise.
But is this really a bull market? In the end it could be, but for now there are some big caveats.
First, if you think of a bull market as meaning that stocks are in a definite uptrend, then the term “bull market” is currently being misapplied. It is not at all clear how the market will develop in the next month or year. Second, even as a retrospective measure of market performance, the term “bull market” is premature, as it uses a more rigorous definition that I will explain makes much more sense to me.
The popular definition
A much-repeated definition — and one that I think is oversimplified and potentially dangerous — is that a bull market is one that has gained 20 percent from its last low. (By the same logic, a bear market is a market that has declined 20 percent since its last peak.)
That sounds easy. It is sometimes referred to as the “official” definition, although it is nothing like that.
The main problem with this definition is that it seems to say something about where the market is going, not where it is. It’s not a big bull market when you’re losing money. But investors who have been in the stock market since the beginning of last year have actually lost money.
Keep in mind that stock prices would have to fall at least 20 percent to be classified as a bear market. That means a bull market would need a gain of at least 25 percent to erase bear market losses. (Suppose you have $1,000 in the market and the price falls 20 percent to $800; it needs to gain 25 percent, or $200, to get back to $1,000.)
For investors who, like me, hold the broad market via low-cost index funds, the simple 20 percent definition means you’ve lost money since the market peaked. To believe this is a true bull market, you have to assume that it will keep going up. It’s a magical thought, and with the Fed signaling that it intends to raise interest rates further, it’s dangerous.
Wall Street makes money by being bullish. It benefits when people put their savings into stocks. I pointed out that Wall Street’s annual forecasts are wildly inaccurate, mostly because they are overly optimistic.
But after big market declines in bear markets, like in 2022, they are often overly bearish. In December 2022, the average Wall Street forecast was for the S&P 500 to end 2023 at 4,009, but the market is well above that now. As is often the case in the middle of the year, when their forecasts are off, investment firms belatedly increase their forecasts. Goldman Sachs did so in a June 9 note to clients, stating, “We are raising our year-end price target for the S&P 500 to 4,500 (from 4,000), which represents 5% upside potential.”
More bullish corrections from Wall Street firms are likely. But that doesn’t mean much. In the event of severe market slumps, the forecasts are revised downwards. The fact that the market has risen does not mean that it will continue to rise – unless investors begin to believe that it will and act on that optimistic belief, pushing the market higher and higher. A bull market based on emotional excitement and not backed by rising earnings can easily become a bubble.
A history of fuzzy metaphors
Bulls, bears and bubbles have been ambiguous metaphors for centuries. These descriptive but imprecise terms were popularized by great writers – and unfortunate investors – in the 18th century.
Alexander Pope, the poet, satirist, and hapless investor, used bulls and bears in 1720 to describe his hopes for the South Sea Company’s stock when it was still rising – and before it became infamous as the disastrous South Sea Bubble .
Pope’s flowery language and mythological references seem excessive to 21st-century ears, but its underlying meaning is clear: “Come and fill the cup of the South Seas,” he wrote. “The gods will take care of our tribe: Europa gladly accepts the bull, and Jupiter gladly rejects the bear.” In other words, let the good times roll!
But the bear soon won.
Jonathan Swift, Pope’s friend and fellow satirist, wrote sadly later that year of a “mighty bubble” as South Sea stocks collapsed, wrecking the UK economy and shrinking the fortunes of thousands of dumb cops – not just Pope and Swift, but them too the genius physicist and inept investor, Sir Isaac Newton.
This episode continues to be studied from generation to generation, although a multitude of new investors learn these hard lessons only through painful experience.
A sober solution
Save yourself some pain.
We can’t get rid of the terms bull and bear. They are too ingrained, too widespread and too convenient. But when it comes to categorizing and periodizing the stock market, there is a better way.
It is the one used by Howard Silverblatt. He is a senior index analyst at S&P Dow Jones Indices, which manages and creates America’s two most popular stock market indexes – the S&P 500 and the Dow Jones Industrial Average.
Mr. Silverblatt, who has been in the business for more than 46 years, does not claim to formulate “official” definitions, but his position and experience make him as official as anyone else in the marketplace.
He says the S&P 500 may be in a bull market, but he won’t declare it a bull market until the index touches its last high of 4,796.56 on Jan. 3, 2022.
Until that happens, this is still a bear market on his and my track record.
Note that this retrospective categorization of the stock market is similar to that performed by the National Bureau of Economic Research for the economy. The NBER is the closest thing to an official recession arbiter. A recession declaration isn’t made until long after the recession has started, because with a system as complex as the American economy, you just can’t be sure in real time.
Are we in a recession now? There’s a lot of data, but we don’t even know that. Neither does the Federal Reserve. However, it still has to make decisions as it sets interest rates.
Labeling recessions — and bull and bear markets — is critical to understanding what has already happened, but these labels are not particularly helpful for acting now or preparing for the future.
An agnostic perspective
Mr. Silverblatt’s definition of bull and bear markets raises doubts. But even if a bull market has been declared by his definition, it’s not clear how that should affect your investment portfolio.
Paradoxically, I’m not even sure I hope we’re in a bull market.
That’s because I intend to continue investing in the years to come. If the market goes up, say, another 10 percent next month and we’re by definition squarely in bull market territory, I’ll be richer by now. But let’s say the market then falls 30 percent in August — and stays low for years.
In that case, recent bull market announcements will be bitter memories, if remembered at all. It’s always better to buy stocks cheap and sell them higher. Last year, when prices were 20 percent lower than now, was an excellent time to buy stocks. Now? It’s not as good as it was then, even if the market is going up now.
Fortunately, long-term investors don’t have to time the market.
Instead of focusing on where stocks might go over the summer, consider that the stock market has always gone up for periods of 20 years or more. However, keep in mind that there are often intermittent sharp declines during these periods.
I try to come full circle by always being bullish about long-term investing and nervous about what might happen in the next week, next month, or next year.
Are we in a bull or bear market now? It does not matter.
I’ll just try not to hype it up when the market goes up, or be totally chilled when it goes down. Blisters can be a personal disaster. But steady, diversified investing has been successful for centuries, in both bull markets and bear markets.