If this is a bull market, it sure doesn’t feel like one.
While stocks globally have been trending higher for the last year and a half, there is a palpable sense that it could all go wrong at any moment.
The collective mood is awash in pessimism, and plenty of market observers are bracing for that one bad inflation report that sends financial markets reeling.
Canadian investors got a taste of that just this week, when the latest consumer price data showed a reacceleration of inflation that is bound to make the Bank of Canada uncomfortable. So much for imminent rate cuts.
And yet all the bad vibes don’t align with the underlying trend in stock markets, which is one of resilience on a global scale.
From Japan to Germany to the United States, national stock benchmarks have reached new multiyear or all-time highs in recent weeks. The S&P 500 on Friday hit its first record high in two years, rising 1.2 per cent on the day to end at 4,839.81 points. That beat its previous record close of 4,796.56 on Jan. 3, 2022.
And the gains have spread beyond Big Tech into a variety of sectors and smaller stocks.
As Josh Brown, CEO of U.S.-based money manager Ritholtz Wealth Management, wrote in a recent post: “Not only are we in a bull market, that bull market is actually expanding and gaining in strength.”
Think back to a few months ago, when pretty much the only thing that was working was the group of stocks known as the Magnificent Seven.
Most stock benchmarks were sporting respectable gains at the time, some even by enough to meet the unofficial threshold denoting a bull market. The S&P 500 index, for example, rose by 28 per cent between its October, 2022, trough and July of last year.
But the experience of many investors over that time didn’t exactly scream “bull market.” That’s because the average stock was not performing nearly as well as the overall market.
In the first 10 months of the year, 72 per cent of stocks in the S&P 500 index underperformed the index itself. That’s highly unusual, if not unheard of. Even stranger was the fact that 57 per cent of the index’s stocks were in negative territory, even as the S&P 500 was up by double digits.
A great deal of stock market mediocrity last year was masked by the unstoppable rise of the likes of Microsoft Corp. MSFT-Q and Nvidia Corp. NVDA-Q This was true globally, as well. Through the end of October, the MSCI All-Country World Index, which covers 85 per cent of the investible equity universe, marked about US$3.5-trillion in gains, almost all of which were attributable to the Magnificent Seven.
Things changed around Halloween. Confidence in a soft landing grew as the global inflation crisis faded. And with that, the phony bull market became a real bull market.
Defensive sectors, which had been soundly punished in a rising rate environment, started to make up some lost ground. The S&P/TSX Capped Utilities Index, for example, is up by 10 per cent since last October, after suffering a drawdown that wiped out nearly one-third of its value.
The market’s favour has also shifted back to the beleaguered small-cap space. The Russell 2000 Index of U.S. small-cap stocks has gained 16 per cent since October, even after factoring in a dip over the past few weeks.
Geographically, the rally has also spread far and wide. The Nikkei 225 has gained 17 per cent since October, and just this past week made a 34-year high. The German DAX index hit an all-time high a month ago. Even the S&P/TSX Composite Index is up by 10 per cent.
There are few signs, however, of the kind of optimism that normally accompanies bull markets. Trillions remain parked in the safety of cash and money market funds. And Canadian consumers remain overwhelmingly negative about the economy and their own financial health.
The Conference Board of Canada’s index of consumer confidence is barely higher than the lows set in the global financial crisis and the COVID-19 pandemic.
Similarly, the latest Bank of Canada survey of consumers reported a deterioration in how Canadians are feeling about their personal finances, the job market, and the economy.
While the Canadian economy certainly has concerning weaknesses, they don’t seem to be as significant as the national mood would suggest.
A similar trend has taken hold in the U.S. over the past year or so, whereby negative sentiment seems to have detached from economic reality.
There’s good reason to believe inflation is driving the dour mindset. Watching one’s purchasing power shrink has a powerful impact on the public’s perception of the economy.
The mood hasn’t really improved even as inflation has receded. That’s probably because the average Canadian doesn’t believe the scourge of inflation will be defeated quite so easily. The Bank of Canada’s surveys consistently show consumers expect inflation to be around 5 per cent one year from now. That’s higher than even the current rate of inflation.
Until people start believing that excessive inflation is on the way out, they aren’t likely to take much comfort in the bull market.
Tim Shufelt