🐂 A bull for me, not for thee

Hey hey, happy Monday!

It’s a special Monday, as I’m here in lovely Huntington Beach, California for Future Proof – the coolest wealth festival around. I’ll be here through tomorrow night, come say hi at the Ritholtz pad on the boardwalk! I’ll be speaking about

Also, it’s an especially cool Monday because…OptimistiCallie’s theory on the great wait was featured in not one, but TWO stories last week. Check ‘em out in Benzinga and Marketwatch. We’re making HEADLINES, people.

This week, we’re exploring where the bull market is…and more importantly, where it isn’t.

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Let’s kick things off with a philosophical question.

Is it a stock market, or a market of stocks?

Ask a handful of experts on Wall Street and you’re bound to get different answers.

Some – the economists, S&P 500 price target setters, social media commentators – would tell you it’s a stock market impacted by sweeping events that change the trajectory of the US economy and consequently, the companies that make up the economy.

Others – the quants, stock analysts, and day traders – would argue it’s a market of stocks, each  affected by its own unique set of circumstances. Throw several thousand stocks together and voila, the market moves.

I’m generalizing, of course. Most honest analysts will tell you the answer is a bit of both, even though they secretly value one view over the other.

I’m a stock market gal, but I believe the market of stocks is telling us something important at the moment.

The stock market has been in a raging bull for years, yet the market of stocks may be starting to catch up.

Wall Street has been saying we’re in a bull market for almost two years now.

This is technically accurate. The S&P 500 – or the index of the largest 500 publicly traded stocks in the US – has climbed 54% since the lowest point in October 2022, collecting 38 record highs along the way. If you follow the S&P 500 as a proxy for the stock market, then it’s hard to deny we’re riding a certified 100% free-range, grass-fed bull.

Now that the bull is charging forward, people are naturally asking when it’ll stop. Our brains love to think through worst-case scenarios, so pessimism is pervasive throughout a bull market.

The question is more poignant now that the job market has stalled and the Fed – that group of nerdy DC-based academics in charge of balancing the economy – is on the verge of cutting rates.

It’s an especially valid question if you know that stocks’ biggest crashes have overlapped with nasty economic crises, and that only a handful of stocks have driven prices higher. Through that lens, the bull looks weak and vulnerable.

However, the bull’s biggest weakness could soon become its biggest strength.

This is where the market of stocks comes in.

The S&P 500 is broken down into 11 main sectors to give us an idea of which stocks are driving market moves. Just two of 11 sectors have kept up with the S&P 500 since the bull market began.

The gaps between sectors are particularly wide, too. Six sectors are more than 20 percentage points behind the S&P 500.

Moreover, a sizable chunk of America’s biggest companies haven’t recovered from 2022’s vicious market crash yet. Two S&P 500 sectors and 59 stocks have yet to reclaim their 2021 peaks. 

The market’s smallest stocks (or “small caps’) tell the same story. The Russell 2000 – a collection of stocks with $2 billion and under in market value – has risen just 26% since the market’s October lows.

This is unusual. Small caps are known for having the best sniffers on the market, so they tend to rebound faster than larger stocks.

Not this time, though. Small caps – represented by the Russell 2000 Index – have trailed the S&P 500 for almost the entire bull. They’re about 13% below their 2021 highs and nowhere close to catching up.

A bull market rarely benefits every stock equally. There will always be relative winners and losers – expanding and contracting industries, flourishing and dying companies. Mama always told me life isn’t fair, you know?

But the gap between the haves and have-nots has been alarmingly wide.

Heck, just 30% of S&P 500 stocks have kept up with the index since the bull market began.

You can chalk this weird “bull for me, not for thee” environment up to one main culprit: high interest rates. 

Since the 1970s, most bull markets have been born from rate cuts boosting the economy and luring money into riskier assets, not the hikes and high rates of late.

In a way, high rates have forced a sense of healthy discipline. Investors have been putting money into savings rather than stocks, drawn to the appeal of a risk-free 5% return. Stock buyers have focused on profitable, well-known (primarily tech) stocks, often at the expense of other investments.

There’s nothing inherently bad about restraint. 

In fact, it’s a strong argument for why this stock market bull should live longer.

Bulls die from excess, not restraint.

If the Fed applies the right touch and the economy stays afloat, the market of stocks may get the oxygen it’s been deprived of for almost two years.

In fact, it’s already happening. Market rates have come down since the end of June, and Wall Street now expects the Fed to cut its policy rate from 5.5% to around 4% in just three months.

At the same time, tech has lost its lead to sectors like real estate and utilities – groups that thrive in low-rate environments. The Russell 2000 of small-cap stocks has jumped 6.6%, almost double the S&P 500’s gain over that same period. 

Some say this bull is dying, wounded by slowing growth and dwindling participation.

Maybe it hasn’t had a chance to live yet.

Watch the market of stocks.

Thanks for reading!

Callie

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