A New Bull Market Became Official in June, But It Looks a Little Wobbly

In early June, the S&P 500 index closed 20% above its October 2022 bottom, marking the official start of a new bull market. However, despite the summer rally, many market experts remain skeptical about the sustainability and strength of this new bull market.

Key Takeaways:

• The S&P 500 closed 20% above its previous bear-market low, confirming the start of a new bull market.
• Some Wall Street analysts have revised their year-end forecasts for the S&P 500, predicting higher stock prices.
• According to historical data, bull markets that begin with a V-shaped bottom tend to outperform. The current bull market lacks this characteristic.
• While the market has seen gains, most of them are driven by a few large-cap tech stocks, raising concerns about concentration.
• Recession indicators, such as an inverted yield curve and weakness in leading economic indicators, suggest a potential economic downturn.
• The Federal Reserve’s battle against inflation and the outlook for corporate profits also pose challenges for the bull market.
• Despite the challenges, experts suggest maintaining a balanced portfolio with high-quality holdings or equal-weight index funds.

Analysis of the Article

Despite the official start of a new bull market, there are several reasons why market experts remain skeptical. One concern highlighted in the article is the lack of a V-shaped bottom, which typically signifies that stocks have reached oversold and undervalued levels. Without this characteristic, the market’s advance has been described as a “grueling struggle.” Additionally, the concentration of gains in a few large-cap tech stocks raises questions about the breadth and sustainability of the market’s rally.

Recession indicators, such as an inverted yield curve and weakness in leading economic indicators, also contribute to the skepticism. An inverted yield curve, when short-term yields exceed longer-term yields, has historically been a reliable predictor of recessions. This indicator, along with the U.S. Leading Economic Index, which forecasts turns in the economy, currently suggests a potential recession within the next 12 months.

The Federal Reserve’s battle against inflation presents another challenge for the bull market. Expectations of one or more interest rate hikes before the end of the year indicate the Fed’s ongoing efforts to curb inflation. Higher interest rates could impact corporate profits and market sentiment.

In terms of outlook, experts believe that despite the challenges, the bull market will eventually gain momentum. However, maintaining a balanced portfolio with high-quality holdings or equal-weight index funds is recommended to mitigate risks. High-quality holdings, such as those found in JPMorgan U.S. Quality Factor (JQUA), can provide a good balance of risk and reward. Meanwhile, equal-weight index funds, like Invesco S&P 500 Equal Weight (RSP), can minimize the dominance of a few large-cap stocks and provide exposure to attractively priced small- and mid-cap stocks.

Conclusion

The official start of a new bull market in June may be met with skepticism due to various factors concerning the market’s strength and sustainability. While some analysts have revised their year-end forecasts to predict higher stock prices, concerns about the lack of a V-shaped bottom, concentration of gains in large-cap tech stocks, recession indicators, and the Federal Reserve’s battle against inflation persist. Investors should consider maintaining a balanced portfolio with high-quality holdings or equal-weight index funds to navigate the challenges and take advantage of potential opportunities.