The Bull Market Turns Two

No one knew it at the time, but two years ago last Saturday, a bull market was born. While this is mostly a trivial milestone with little actual meaning for long-term investors, looking back at the past two years is a good, timeless lesson in how markets work. Let us take a trip down memory lane.

The year was 2022, a challenging one for investors. A sentiment-driven bear market started on January 4 as myriad fears took turns leading headlines. Elevated inflation. Fed rate hikes. Russia’s invasion of Ukraine. Europe’s energy crisis (and concerns soaring costs and potential rationing would drive deep recession in Western Europe). US midterm election uncertainties.

Amid the many fears, global markets slipped -0.4% on October 12, leaving the MSCI World down -26.1% from January 4.^[i] The next day, the Bureau of Labor Statistics released its September CPI report, which showed that while headline CPI eased to 8.2% y/y from August’s 8.3%, the “core” rate (which excludes food and energy) accelerated to 6.6% y/y, a new multidecade high. Despite opening in the red on Wednesday, October 13, global stocks rebounded and finished that Wednesday up 1.9%.^[ii]

Boom, there it was. Naturally, at the time, nobody cheered a new bull market’s birthday. Investors remained fixated on inflation, and many observers worried September’s numbers indicated stubborn price pressures—and a possible inflation reacceleration. Most thought the Fed needed to pour on more hikes to get prices under control, and these “tightening” and “higher for longer” rates, according to the conventional wisdom, would sink stocks further.

Outside inflation, headlines were preoccupied with the UK’s political crisis over then-Prime Minister Liz Truss’s “mini-budget.” The spate of modest tax cuts, a reversal of planned tax hikes and energy price assistance sparked a sentiment-driven UK Gilt selloff that triggered a crisis at leveraged pension funds, drawing Bank of England (BoE) assistance. By the time the bull market was born, Truss was clinging to her agenda even as her government collapsed, driving political and fiscal uncertainty. Debt crisis fears hadn’t abated, and projections were grim.

Meanwhile, expectations for the following year were quite pessimistic. Most economists argued a US recession was all-but inevitable in 2023, with the only questions about the downturn’s magnitude and start date.^[iii] On the investment front, a Bloomberg aggregate of 2023 Wall Street strategists’ market outlooks predicted a decline in the S&P 500—the first time the aggregate forecast was negative in decades.^[iv]

Even now, there is some disbelief in this bull market. Many call it the fruit of AI, as if Tech and Tech-related things are the only factors driving it and the only beneficiaries. But the rally is real and broad, and it formed and grew as reality exceeded expectations, driving stocks up the proverbial wall of worry.

See inflation’s downward trajectory over the past two years. Prices never ended up reaccelerating to surpass June 2022’s high.

Exhibit 1: Inflation’s Downward Trajectory

Source: FactSet, as of 10/14/2024.

That UK political drama cost Truss the premiership, but the UK didn’t have a financial crisis, pensions pulled through and the BoE didn’t need to keep the industry on life support. Yields gradually eased in sympathy with global bond markets.

Europe’s energy situation also wasn’t as dire as forecast. In 2022, the baseline expectation was for wintertime blackouts since Western European nations were cutting off ties with Russian producers. The price cap on Russian oil, widely expected to whack global supply, was coalescing. While the Continent felt some economic pain—especially in Germany—European nations escaped the worst-case scenarios by finding other energy sources. As for the oil price cap, Russia’s “shadow” fleet of oil tankers have evaded sanctions and sold oil to countries that didn’t comply with Western sanctions—a reminder that no one variable controls global supply and demand. 

As for that highly anticipated US recession, it never came. There were pockets of weakness, mostly in manufacturing and goods industries, as businesses retrenched in advance of an expected downturn. Companies worked off some excesses and got lean and mean in preparation for widely expected tough times—and that anticipation ended up mitigating much of a recession’s purpose. Firms are now going on offense, contributing to growth.

Now, to be clear, we aren’t saying all is stellar or global economic conditions are robust. There are soft patches (like Germany). But as Sir John Templeton put it, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Amid that prevalent pessimism two years ago, this bull market began. Stocks didn’t wait for an “all-clear” signal or the data to even start showing improvement. But they looked out to the next 3 – 30 months and recognized the probable reality wasn’t as poor as many believed. This is a reminder: Waiting for perfection—or even “good news”—can be very, very costly.