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If this is a Bull market, it is a Very Strange Bull Market

CAMS Weekly View from the Corner - Week ending 4/19/24

April 22, 2024

While we have not addressed this topic within published editions for some time now we have not stopped addressing it internally as recent months to a year-plus has unfolded.


The collective view as we understand said view is that 2022 washed out the excesses of the previous bull market run and through that process a 2022 bear market (down trending market) refreshed the landscape and set the stage for a strong new multi-year bull market run. 


Fresh new bull markets are always powerful upward trending beasts where they leave no question that one has begun and is actually on-trend.  While there are always various companies leading the charge of a new bull market in terms of price performance the broad stock market landscape is always abundant in strong trending opportunities across the entire market landscape


Conversely, bear markets can take on different looks as they can be and historically have proven to be as cunning as a fox.  It is as though they are as smart as a fox but rather than hunting vermin they hunt your capital. 


Bear markets consistently offer bull traps where they convince the masses the bear is done and runaway profits are about to be made if you merely commit your capital. 


The bull trap is set when what appears to be a new upward trending market pulls the rug out and reverses course leaving the bull (your capital) trapped in a problematic situation rather than experiencing the profit run as was expected.


Speaking to bear market cunningness these consistent bull traps are not consistent in time. 


For example, sometimes they show themselves pretty quickly whereby an investor realizes they were duped nearly right out of the gate.  Sometimes they drag on for months, if not longer, appearing all is good as though there really is a strong new bull market taking over the field only to experience later this is not the case as bear market downside kicks in again.


Placing this all together bull markets leave no doubt when viewing the broad market landscape that “yep, that right there is a bull market!” 


In true new bull markets there is no room for bear market questioning because there is nothing to point to in a questioning format such as why is X area of the market doing so poorly or why is the broad market landscape performing so poorly relative to how a few handfuls of companies are performing.


Strangely, Questions Continue to Surface from the Stock Market


In-house we find ourselves asking why questionable behaviors are continuing to radiate from the stock market if this in fact a solid new bull market as of late 2022 to early 2023.


Importantly, this question is not some esoteric intellectual question. 


Operating approaches within bull and bear markets are vastly different.  To keep this very simple, counter to bull markets and approaches within them, a bear market environment offers a non-trustworthy environment for deployed capital.  Selectivity, timing and downside protection measures become doubly important in order to protect capital while simultaneously working to grow it when in a bear market environment.  Why?


As offered, bear markets and the traps set within them cannot be trusted.  Every time you think it is all clear and the bear is done it reasserts itself with more unexpected downside behavior.  In addition, along the path, a true bear market will offer upside rallies that seem like true new bull markets only to offer it was a bear market rally in disguise given some time. 


Have we been experiencing this very disguise in the previous year or so?

The above chart dates back to the early part of this 21st century.  In this timeframe we have had 3 notable negative stock market environments that we can generally label as bear market backdrops.  First, the early 2000’s coming from the Dotcom bust, second the Great Recession coming from the housing bust and third the Covid timeframe circa 2020. 


We are leaving 2022 out of this for now as there is not enough history to offer whether that was a thing of the past or whether we are still in it as a broader bear market period.  We suspect near-term time will offer clarity as near-term months/year unfolds.


The above chart depicts the outperformance or underperformance of the equal weight S&P 500 compared to the weighted S&P 500.  This approach offers one of many ways to help decipher if the broad stock market is performing strongly or if performance is a result of the exceptional performance of relatively few companies. 


In the case of the equal weight index all 500 companies impact the performance of the index the same – no one company has a greater or less than impact on its returns performance.  Hence it gauges the broad stock market performance.


Conversely, in the case of the weighted S&P 500, select companies have an outsized impact on the performance of this index.  In light of this if these select companies are performing exceptionally well it can appear as though the entire stock market is doing so. 


At times, in light of this weighted aspect of the S&P 500 index, it can offer a less than accurate account of overall stock market performance.  (As an aside, this weighted index is the index that is referenced by everyday media outlets.)


If This is a Bull Market it is Behaving Abnormal to Historical Bull Markets


In the fullness of the above chart we see 3 red up arrows highlighting the behavior of the broad stock market (the equal weighted S&P 500 Index) when entering into a new bull market environment. 


For clarity, when the line is rising in the chart it means the broad stock market, as measured by the equal weight S&P 500 Index, is solidly outperforming the more narrowly concentrated weighted S&P 500 index.


In all three cases, as is customary for a new bull market as previously described, they are strong with the broad stock market kicking into unquestionable gear.  This bull market, if we are truly in a new bull market, has not done so and in fact has done the exact opposite of expected new bull market behavior.


To the far right of our chart our black circle denotes late 2022 and early 2023 – the lift off timeframe of this (suspect) bull market.   


The hard south black arrow is telling us the broad stock market has massively underperformed the performance of a handful of companies that dominate the price performance of the aforementioned weighted S&P 500 index as time has unfolded from the lift off point of our black circle. 


The contrast in behavior compared to previous bull market launch points is stunning.  This is opposite behavior to what is historically normal behavior for fresh new bull market environments. 


In observing the full stock market landscape over the previous year-plus the stock market itself has shown questionable behaviors.  These behaviors have us consistently contemplating - is this really a new bull market or a bear market in disguise?


The above charted behavior is only one of several reasons why we question if we have been in a new bull market of late or if this is going to prove to be another example of how cunning bear markets can be.


We continue to watch these various questionable behaviors and if they continue will share more of them as this front half of 2024 unfolds.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


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