The S&P 500 Index has advanced by 27% over the past nine months, with gains accelerating considerably in the past six weeks. This may seem extraordinary, and some investors’ enthusiasm around equities has led them to call the beginning of a bull market. But these recent gains aren’t all that different from prior bear-market rallies: In fact, in all seven bear markets since 1960, stocks have come close to reaching their prior highs before falling to their ultimate lows for the cycle, which is why we think investors may want to remain cautious today.
Sustaining the Gains – for Now
Should investors expect history to repeat itself, sending the current highs of the bear-market rally to new lows? Despite extensive tightening to monetary policy over the last year, two factors have kept the economy and markets buoyant and may do so for a while longer:
- The sheer amount of money in circulation has helped to cushion the U.S. economy and corporate profits. The country’s “M2” money supply—which includes money in checking accounts, certificates of deposit and money market funds—sits at $20.8 trillion as of May. That’s down only slightly from a record high in July 2022, after pandemic-related government stimulus caused the supply to rise sharply in 2020 and continue to grow well into 2022, leaving still ample liquidity today.
- Many U.S. individuals and companies have locked in low interest rates, which shores up their balance sheets. For many years prior to the recent Federal Reserve rate hikes, households and companies alike were able to borrow at historically low rates—think 2.65% for the average 30-year fixed-rate mortgage as of January 2021. This has made them less sensitive to the rapid rise in rates over the past year.