“Boy, that escalated quickly.” Ron Burgundy of Anchorman
This isn’t a surprise
They say the stock market takes the escalator up, but the elevator down and the past four days have sure felt like an elevator down. It feels like a long time ago, but exactly one week ago the S&P 500 was at a new all-time high. Now fear and worry are back. Here’s the thing, the second half of February tends to be one of the weakest parts of the year, not to mention February in a post-election year is the worst month on average. We’ve been discussing all month why late February can be a banana peel and I even said this on CNBC with Scott Wapner last week, before the weakness started.
Here are two charts that should look quite familiar if you’ve been following what we’ve been saying all month.
Back at New Highs, Now What?
Here’s the good news. This is still a bull market and this seasonal weakness doesn’t have us overly concerned yet. A week ago many wondered how stocks could be back at new highs with all of the negative headlines and the easiest answer is we are in a bull market and stocks tend to go higher in bull markets. We’ve been saying we are in a bull market for more than two years and it is important to remember that surprises happen to the upside in bull markets. Here are some reasons stocks are back at new highs, many of which we’ve covered in detail over the last few months:
- Record earnings, solid revenue, and new cycle highs in profit margins
- Markets climb a wall of worry and there is a lot of worry out there
- This bull market is actually quite young, so many more years of gains is possible
- The labor market remains strong, with healthy wages and incomes
- Inflation should improve later this year, potentially opening the door for the Federal Reserve (Fed) to cut more than is being priced in right now
- Productivity in the US has been strong the past six quarters, and historically, periods of strong productivity have led to above-trend economic growth and stock gains
- The bull market is broadening out, meaning many more sectors and groups are leading. It isn’t just about seven big tech stocks anymore
There are likely many more reasons, but one we want to make sure we highlight again is that this bull market is still young. As we show here, it is now only 28 months old and bull markets tend to last many more years once they get to this point. In fact, going back fifty years the five bull markets that made it into their third year (like this one) lasted an average of eight years total and the shortest was five years.
Many investors are scared of heights, meaning they don’t want to touch stocks at new highs. Well, we do like buying low too. We were suggesting overweighting equities in these very commentaries two years ago and fortunately the investors who followed that advice are quite happy to have stocks making new highs. But what do you do now?
It is important to understand that new highs are very common and tend to happen more than you’d think. Starting in 1957 (when the S&P 500 moved to 500 stocks) a new high has been hit about every three weeks, with more than 1,200 new highs along the way. Looking at what happens after all of those new highs, stocks were higher a year later 71.0% of the time and up a median of 8.3%, so about what you tend to see in any random year. Yes, some day there will be a new high that is the last one for a while and rough times could be right around the corner. The good news is we don’t see that happening anytime soon and 2025 still looks like it should be a nice year for investors.
Remembering Five Years Ago
The headlines might be scary today, but they were nothing like what we started experiencing this time five years ago. The S&P 500 peaked on February 19, 2020 and five weeks later was down 34% for the fastest and most vicious bear market ever. Then, nearly just as quickly stocks turned around and rallied, but unfortunately many investors panicked and sold in the depths of the pandemic and took a long time getting back into markets.
They say the stock market is the only place where things go on sale and everyone runs out of the store screaming. Well, we saw a lot of selling and screaming back then and unfortunately a lot of investors sold right before a huge rally and missed a generational buying opportunity.
Think about all of this a little more. We had a 100-year pandemic that shut down the global economy and then a second vicious 25% bear market in 2022. We’ve never seen back-to-back bear markets that close to each other, making the start of this decade extremely rough for investors.
Yet, the S&P 500 is up more than 80% since right before the market peaked in February 2020, for an annualized gain of more than 12%! So if you simply held in the face of two scary bear markets you’d be up more than 80%. That is easier said than done, but many investors did just this.
Now imagine if you not only held, but used that weakness to buy solid companies at very attractive prices? This is why we invest for the long run and use the scary times as an opportunity, not a time to panic.
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President Eisenhower once said, “Plans are useless, but planning is everything.” Have a plan for the next time things are bad out there. Are you going to panic? Or use it as a time to follow your plan? Think about that the next time you see some red on the screen and all the commentators on TV all worked up over the latest worry. Worries happen each year—2025 wasn’t going to be any different. Spoiler alert, 2026 and 2027 will have scary headlines and big market down days as well.
This is a bull market and no one knows when it’ll end, but we were one of the very few places to say it was a new bull market two years ago and we still see reasons for it to continue, so enjoy the ride.
For more of our latest thoughts on this bull market, seasonal weakness, and why the consumer is in much better shape than many think, be sure to watch (or listen) our latest Facts vs Feeling podcast.
For more content by Ryan Detrick, Chief Market Strategist click here.
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