5 things to remember as the US stock market enters another bull run

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It’s official now: We’re officially in a bull market, at least the S&P 500 index. A bull market is technically referred to as a market rising at least 20 percent from its low point. In the case of the S&P 500s, the low was in October 2022, so the 22.1 percent rise since then means we have a bona fide bull market on our hands.

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Sure, it doesn’t really feel that way, as the market gains were driven almost entirely by seven mega-cap stocks. But if it really is a bull market, the question becomes: what to do? Here are five things to keep in mind.

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It actually means nothing

First and foremost, don’t get all confused. A randomly chosen winning percentage has no magical powers. Your loser stock doesn’t necessarily become a winner all of a sudden. The 20 percent threshold is just a number. A number of things can cause the market to crash, rise or do nothing.

Don’t change an investment strategy just because someone says a bull market is official. Some bull markets don’t last long, others do. As it was before we hit 20 percent, no one really knows what tomorrow will bring. The media will hype the new bull for a while until something else happens. Fundamentals will still matter and are what drives the market.

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It may take a while

If the market has really turned around, it could take some time. There is a lot of money on the sidelines, the fear of higher interest rates remains and the pain of the market in 2022 is still a fresh memory for investors. Investors with a lot of money must therefore be lured back into the market.

How did this happen? Well, a rising market brings about a return of confidence. Confidence causes investors to slowly start buying. The buying drives the market, and more investors become more confident, and the cycle continues. This can take years if everything works properly. So don’t worry if you miss the first part of the bull market. There is time if it is indeed a new market era.

Negative nellies will return in force

Every time the market goes well, the doom and gloom clan starts to get nervous and repeat their dire warnings. It has gone up too fast, they say, or the fundamentals don’t support these new valuations. Of course they could be right. But they were wrong in October, and they might as well be wrong now.

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Pay attention to what your companies are doing and ignore anyone making predictions. Remember, any stock that doubled or more this year was sold by someone who didn’t think it was very good at the time of the sale.

Markets can ignore bad news

Once markets get going, they often gain momentum. The fear of missing out on a rally can be a powerful influence, especially for all those managers who have raised money due to concerns about everything from the war in Ukraine to another round of COVID-19.

Suppose you are a fund manager who has 50 percent in cash. We are now half way through the year and your fund may be nine percentage points behind the market. You missed half of the S&P 500’s 22 percent year-to-date return, but picked up a few percentage points of interest income along the way.

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With your fund lagging so far behind the benchmark, your year-end bonus is now in serious jeopardy. Your customers may be considering redeeming their fund units. What are you doing? You start spending some money on stocks so you don’t fall even further behind the market by the end of the year.

This cash inflow can be powerful, so much so that even bad news can be ignored for a while. Unemployment could rise, we could even go into an official recession, but the market could still rise further because bad news will only mean lower interest rates and lower inflation.

Check out the VIX

The CBOE Volatility Index is a current measure of the expected volatility of the S&P 500. For most of 2022, it hovered around 28 to 30, which is a fairly high level, suggesting that investors were very concerned. Market panics, like in the early days of COVID-19, can see the VIX jump to 60, 70 or more as sheer fear sets off a wave of volatility. Today the VIX is 14.5. The markets have simply calmed down.

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Now, a contrarian investor might say that a low VIX is a sign of investor complacency, and things could suddenly turn volatile again. This is sometimes true. But it is equally true that less volatility generally makes investors much more comfortable, and much more willing to risk their capital in the market. A less volatile stock almost always gets a higher valuation than a volatile stock. So low volatility could only drive the bull market higher and longer.

Peter Hodson, CFA, is Founder and Head of Research at 5i Research Inc., an independent investment research network that helps DIY investors achieve their investment goals. He is also a portfolio manager for the i2i Long/Short US Equity Fund. (5i Research personnel do not own Canadian stocks. i2i Long/Short Fund may own the non-Canadian stocks mentioned.)

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