Equity markets are about to exit the bear market after a $10 trillion recovery

And yet, less than 20 months after it began, the bear market that engulfed the S&P 500 is only 260 points away from being completely wiped out. Rather than predict trouble, chart patterns that track everything from cross-asset momentum to transportation companies paint a picture of burgeoning economic strength.

That some of the signals out of the US economy are nowhere near as buoyant, and that Federal Reserve policymakers now sound a little less concerned about inflation than they did then, is only annoying to investors who just pushed stocks up for the eighth time in 10 weeks. Should the optimism continue, last year’s bear market has a chance of unwinding faster than all but three of its predecessors since World War II.

I’m shocked that the Fed has actually made the soft landing and everyone has been caught underweight in equities, said Dennis Davitt, co-manager of the MDP Low Volatility Fund, which recently adjusted its positions to prepare for more upward market moves. As people need to get their wallets right sized, they’re going to have to come in and buy, and every day gets harder.

Nearly $10 trillion has recovered in stock values ​​in the past nine months as job growth, consumer spending and corporate earnings defied the doomsayers. Up 27% from its October low, the S&P 500 is now about 5% away from retaking its all-time high of 4,796.56 in January 2022.

If the index does a round trip by September, it will fully recover twice as fast as the average of the previous 12 cycles, according to data compiled by Bloomberg.

What began as a rally driven almost entirely by a handful of technology megacaps has turned into a cross-sector surge fueled by receding recession fears. From small caps to energy and banks, economically sensitive stocks are making the final leg up.

While skeptics continue to point to a much-watched recession indicator, the inverted yield curve in Treasuries, as a warning that the economy is not out of the woods yet, the stock market tells a different story.

The latest evidence comes from synchronized outbreaks in transportation and industrial supplies. The Dow Jones Industrial Average rose for 10 straight days, its longest winning streak in six years, while a similar measure tracking airline, rail and trucking companies rose for four weeks in a row. Both reached their highest level since the beginning of last year.

According to supporters of an age-old charting technique called the Dow theory, which posits that both groups are harbingers of future economic growth, simultaneous strength is a bullish sign.

Momentum has a habit of feeding itself, said Michael Shaoul, CEO of Marketfield Asset Management. Where we feel a bit more comfortable is the broadening of the rally to cover the most economically sensitive sectors.

Stocks aren’t the only assets ignoring yield curve alarms. Oil bounced back from a slump in the first half to climb back above $75 a barrel, while credit spreads narrowed to four-month lows.

Whatever scary scenarios investors had in mind for 2023, few have panned out so far. Although several regional lenders failed, the government hastened to shield the consequences and now the financial resultsbig bankslargely exceeds expectations. The KBW Bank Index rose more than 6% for its best week in 14 months.

The fundamental resilience is compellingeconomiststo rethink their recession calls as they spur Wall Streetstrategiststo raise their year-end price targets for the S&P 500.

Reluctantly or not, bears give in one by one.Computer-controlled fundsthose shorting stocks after the 2022 sell-off were among the first to capitulate.

From trend-followers to volatility-focused funds, systematic managers captured a total of $280 billion in global equities in the first half of the year alone, according to an estimate by Morgan Stanley’s sales and trading desk. This week, their net equity leverage, a measure of risk appetite, reached its highest level since early 2020.

After someinitial resistance, stock-picking investors began to trim their short positions and add longs. Hedge funds tracked last week by Morgan Stanley’s prime brokerage unit saw their net leverage rise more than 50% for the first time since February 2022.

It is a momentum driven market. It’s hard to say when this will stop, says Jimmy Chang, chief investment officer at Rockefeller Global Family Office. But it feels a bit foamy. I still think fundamentally, at least when I look at the numbers, there are some risks.

Chang isn’t the only one with a lingering sense of trepidation. In the most recent survey by Bank of America Corp. among money managers, cash holdings increased from 5.1% to 5.3%. Meanwhile, the demand for protection led to an offering from a new exchange-traded fund that is aiming for ithedgeat 100% of inventory losses over a two-year period.

The list of concerns is indeed long. Ratings are stretched. Inflation may be persistent and the Fed may keep rates high for longer. Although perhaps delayed, the threat of a recession is still present. And the bankruptcy filings are piling up.

Markets climb a wall of worry, and sometimes, the more things investors worry about, the better future returns, says Paul Hickey, co-founder of Bespoke Investment Group. Conversely, just when you think the stock market can’t go wrong, you get years like 2022. Complacency kills.