It was only four months ago that the longest-running bull market in history was showing its age. While equities had rallied strongly from October 2019, they had increasing difficulty holding their gains. Meanwhile, defensive positions in gold and long-term treasuries were on the rise.
It wasn’t but ten weeks ago that the equity markets were in the depths of an obvious bear market. The S&P500 index had dropped about 35% in the span of about a month, a collapse that exceeded that of the Great Depression in speed, if not in depth. Unemployment figures were spiking, and production figures were plummeting. The COVID-19 virus had a stranglehold on the world.
Now, while COVID-19 remains an ever-present global danger, the S&P500 just crossed its 200-day moving average at the end of May. Why does this matter? The 200-day moving average is often described as the line in the sand between a bull and bear market, and the index stepped over that line, from bear to bull, with authority.
Even more striking, the index remained above this average all week last week and tacked on another 5% in gains. And everything is rallying, not just the obvious stuff, like Amazon and Zoom, but even the stocks that were hit hardest by COVID-19: airlines, restaurants, and energy.
These and many other indicators point to the strong likelihood that we have entered a new bull market, and it’s happening around the world as well, not just in the U.S.
This is important. If we are in a new bull market, investors who enjoyed the benefits brought by the bull market of 2010-2020 should strongly consider exposing their portfolios to stocks, assuming that they made any changes over the past few months to reduce exposure. There are major gains to be had by investing in the early stages of a bull market, especially in the first two years.
But wait—this doesn’t make sense. Aren’t we seeing 20,000 new COVID-19 cases per day and 1000 deaths? Unemployment is well north of 10%. Many jobs don’t seem like they will come back in a long time, if at all. Even people who have kept their jobs aren’t spending money. How can the stock market be back in a bull market?
I don’t have an answer to that question, and the truth is, nobody else does either. Even Warren Buffett sold his airline stocks near the market bottom, missing out on 100% gains within a few weeks.
We can always speculate why, and I would posit that the accommodative federal reserve is playing a significant role. But while you and I may disagree about the reasons for the rally, there is one thing that we will not disagree about—price. The prices are what they are, and they are up. It’s that simple.
To ignore the indisputable fact of price puts an investor at risk of losses through over- or under-exposure, depending on what direction prices are going. It would be similar to ignoring the severe drop in prices in February and March and suffering a lot of unnecessary pain.
I know it’s not easy. It’s very difficult to tune out distressing current events to see the prices for what they are, without fear or anxiety. But doing so is crucial. The news is not the stock market. Even the economy is not the stock market. Instead, the stock market is a discounting mechanism, pricing in new data months in advance, and living a life of its own. It may take a long time before we are fairly clear why the market is behaving as it has this year.
The rally of last two months has simply been astonishing. There is no question but that momentum trend-following investors should increase exposure to stocks. The bull has returned.