Putting the Market Rally in Proper View

Are you feeling uneasy? If so, we doubt you are alone. Between volatility picking up Tuesday, when the S&P 500 fell more than -1%, and another US regional bank failing over the weekend, folks seem on edge. That is especially true, in our view, given the pessimism so prevalent after 2022’s bear market. At times like this, we think it is worth taking a broader view of recent market considerations and remembering volatility is normal even in bull market recoveries, which this rally looks increasingly like.

To our read, the general sentiment of late seems to be that stocks are just bouncing sideways and primed for another drop. So perhaps it might surprise you to learn that the S&P 500 is up 17.6% since its October 12 low, and that the MSCI World Index is doing even better, up 20.7%.^[i] Yes, we have strong double-digit returns—returns that would look very nice in a full year, never mind a little more than half a year—despite continued rate hikes, recession chatter, still-elevated (but slowly improving) inflation, a simmering debt ceiling standoff, heightened trade tensions with China and three US bank failures. That is a lot for markets to deal with, yet deal with it they have. If they have been so resilient thus far, there isn’t much logic in thinking these same issues will cause a major, lasting drop from here. To argue that is to argue markets, famous for their efficiency, are somehow blissfully unaware of the headlines that dot virtually every major financial publication on both sides of the Atlantic and Pacific. That viewpoint is a very risky one, in our view.

With that said, more wobbles are entirely possible. Volatility cuts both ways, and it is hard to have the good kind without the bad kind sprinkled in. Through Tuesday’s close, the S&P 500 has endured 21 daily drops between -1.0% and -2.0% since October’s low and 5 between -2.0% and -3.0%.^[ii] That is where much of the sideways bouncy feeling comes from, no doubt. The good news? This isn’t unusual. Exhibit 1 shows returns and daily negativity during the first year of every S&P 500 bull market since good data begin. Some mid-century bull markets were rather placid by this measure, but bigger swings have been the norm since the 1970s. Early volatility doesn’t make this upturn different from past early bull markets.

Exhibit 1: A Brief History of Early Bull Market Volatility

Source: FactSet, as of 5/2/2023. S&P 500 price returns, 6/1/1932 – 3/23/2021.

Another thing this stretch has in common with the time periods in Exhibit 1: The world doesn’t look pristine. It never does—that is how bull markets climb a wall of worry. All have their fair share of negative headlines and the hunt for the second shoe to drop. In 2020, it was successive COVID waves and renewed restrictions. In 2009 and early 2010, it was the automaker bankruptcies, the rather chaotic passage and rollout of the Troubled Asset Relief Program (TARP) and Dubai’s debt crisis. In 2002 and early 2003, the run-up to the Iraq War dominated the conversation, along with the associated fears of what it would mean for commodity markets and geopolitics in general. A decade before, in the early 1990s, it was continued Savings & Loan Crisis fallout and, across the pond, currency swings that would eventually lead to the European Exchange Rate Mechanism splintering and the pound’s devaluation. All weighed on sentiment, laying the groundwork for reality to beat meager expectations. So while we can’t know that the rally is a new bull market with certainty, the backdrop does have many similarities.

So take a deep breath, and don’t let the headlines get to you. Whether it is earnings, Fed moves, upcoming Fed lending data, Friday’s jobs report or what have you, the information about to come out merely puts numbers and confirmation on a reality that stocks have already lived through or long expected. It can be hard to remember in the heat of the moment that these things are backward-looking, especially if the news seems dim. But backward-looking it is, while stocks are generally looking 3 – 30 months out. Over that span, daily moves tend to even out.