After 248 trading days, the bear market is officially over. The S&P 500 closed at 4,294 on Thursday, up 0.6%. This puts the index 20% above its low point on October 12, 2022. If it felt painful, it’s because it was. This was the longest bear market since 1948, according to the Wall Street Journal, citing Dow Jones Market Data. The average bear market has lasted 142 trading days; this was nearly double.  

There are several factors that have contributed to the end of the bear market.

First, the Federal Reserve has begun to raise interest rates in an effort to combat inflation. This has helped to reduce concerns about rising prices, which had been a major factor in the sell-off.

Second, corporate earnings have continued to grow, despite the economic slowdown. This has helped to boost investor confidence in the stock market.

Third, the war in Ukraine has become more predictable. This has reduced uncertainty about the global economy, which has also helped to support stocks.

Of course, the end of the bear market does not mean that the stock market will go straight up from here. There will likely be more volatility in the months ahead. However, the long-term trend for stocks is still up. Investors who stay patient and disciplined should be able to weather any short-term storms and come out ahead in the long run.

What does this mean for investors?

The end of the bear market is good news for investors. It means that the market may be able to start recovering from its losses. However, it is important to remember that the market is still volatile and that there could be more declines before the next bull market begins.

End of the bear market doesn’t exactly mean we are back in a bull market –

As of June 3^rd, 2023, the SP500 Equal Weight Index, which gives equal value to each stock, has fallen 0.35% since January. This is a stark contrast to the 9.5% gain for the benchmark S&P 500, where companies with larger market capitalization account for a larger share of the index.

The main contributors to the strong negative divergence between the S&P 500 equal weight and the S&P 500 can be attributed to 6 stocks: Apple, Alphabet, Microsoft, Nvidia, Amazon and Meta. These are stocks that have received a big push from the potential artificial intelligence benefits, more on that to follow in this article.

The big five that are responsible for the vast majority of the stock market’s 2023 gains are Apple (up 36% this year), Microsoft (37%), Alphabet (39%), Amazon (44%), and current stock market darling Nvidia, which has surged 159% on AI-related excitement. (Source: Axios Markets)

Without them, the overall market (including dividend payments) would be up just 1.5% this year, according to data provided by Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

“If you also remove the contributions from the two other largest tech companies — Meta (up 120% in 2023) and Tesla (66%) — the S&P 500 would be slightly underwater for the year” Silverblatt says.

If you remember back a few years ago the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) were the engine of the markets. In the late 90’s we had the “Four Horsemen” – Microsoft, Cisco, Oracle and Intel who led the charging bull market. In the late 60’s and 70’s the bull market was sustained by the “Nifty Fifty”. The heavy lifting being done by a handful of companies isn’t uncommon but can be unhealthy for a sustainable bull market.

To achieve a sustainable bull market, the rally would have to broaden out to other areas of the market. We would need to see the other 494 stocks in the S&P 500 begin to increase in value and rise from solid earnings.

What could start the next bull market for investors?

There are really two themes I am currently focused on that I think will lead to the next bull market for investors.

The first theme is artificial intelligence. I am not sure there is a buzzier word as it pertains to markets right now than artificial intelligence and it is important to look past the language and see which companies are set up to implement this technology.

The US labor force is currently struggling with a few things:

• Job Openings – Unemployment numbers are very low and there are several job openings available. Artificial intelligence and machine learning can help with both productivity and the reduction of available jobs, as machines can learn how to do many things from making hamburgers to writing java script code.

• Wage Growth – Available jobs have pushed up wage growth which has contributed to sticky inflation. Sticky inflation is the worst kind because even as the Federal Reserve raises rates, wages don’t seem to be impacted because of job availability. AI can help with this as it can fulfill some of the job openings and lower job availability, essentially putting a freeze on wage growth.

• Productivity – As corporations continue to argue about work from home vs. return to the office, one thing can be sure: productivity has declined. The introduction of machine learning should in theory increase workers productivity as they have a virtual assistant to help them accomplish several of the tasks they had to work on previously, allowing workers to focus on other, more important tasks and become more productive at their careers.

The second theme that I think can move us into a sustainable bull market is the current amount of cash on the sidelines. The Federal Reserve increased interest rates at the fastest clip in history to combat the inflation issues we were experiencing. This rapid increase in interest rates made things like CD’s, savings accounts, and money market accounts more attractive, and as a result people piled cash into these products. Assets in money market funds alone ballooned to a record 5.3 trillion dollars in May. There were a few things that contributed to the increase in money market accounts:

• Higher interest levels being paid on money market accounts.
• The regional banking crisis – three banks, with combined assets of nearly $550 billion, collapsed over a two-month period.
• Investor sentiment – most investors are nervous right now about the economy. We had many indicators that at the time were indicating a high probability of a recession and many investors/money managers were fleeing equities for a more predictable rate of return in a money market account.

As the narrative surrounding a recession continues to evolve and the money begins to come out of money markets back into the stock market, this could provide ample fuel for a sustainable bull market run. The timing of this is a bit difficult as I don’t see the Federal Reserve lowering interest rates this year (making equities more attractive), but earnings results held up much better than many had previously thought, and this is a very positive indicator.

This year has not been the best year for returns as my outlook in January was very recessionary, but as earnings came in and began to tell a different story, we have increased our equity exposure and began to see positive returns as a result. I think the stock market has some volatility ahead but believe the future looks bright for a sustainable bull market run.

My office has spent the last month digging into the future of artificial intelligence and doing an extensive review of the companies that stand to benefit from the current technology and which companies are primed to be the leaders coming out of the next groundbreaking digital frontier. We have produced reports on each of those companies and are invested to ride any productivity increase through future earnings reports as technology begins to reshape society and productivity as we know it. These reports will be discussed with you in the coming client meetings we have lined up, and will be released on our social platforms over the coming months.