Navigating the Bull Market

August 29, 2023

Navigating the Bull Market: Examining optimism, skepticism, and economic realities

Previously published in The Bulletin, Bend, Oregon on August 27, 2023

After a recent trip to Alaska and attending my first ever rodeo (I know, how is this possible when living so close to Sisters, OR?), I have had bears and bulls on my mind. As you may have heard, the S&P 500 officially entered a new “bull market” in June, meaning it closed 20% higher than its recent low in October 2022. This nickname signifies the general trend of the stock market and is given for the direction a bull attacks – upwards with the horns. Meanwhile, its counterpart, the “bear market,” is so named for a bear paw striking down, signaling that the stock market is on a downward trajectory. Of course, the very nature of both bull and bear markets means that neither lasts forever. So, what can we expect from this new bull market? Will the runup be short-lived and snuffed out by restrictive economic conditions, or will the economy prove resilient and overcome investors’ fears? I know enough to say that I (and anyone else, for that matter) cannot accurately predict what is to come.

There is a quote in investing that says, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Along with the increase in stock prices that we have recently experienced, we have also seen a noticeable jump in consumer sentiment, as tracked by the University of Michigan. Although more pessimistic than the long-term average, the trend is moving towards optimism. One might call this the period of skepticism, where most investors remain fearful while holding on to hope that the market will dispel their concerns.

Even though there are positive markers to hold hope in, many are interconnected with a duplicitous negative counterpoint. Economic data reflects an environment mixed with both optimistic and pessimistic indicators. Despite the runup in the stock market, investors have experienced a reduction in the purchasing power of their portfolio due to the elevated level of inflation over the past few years. While inflation has come down from its high of 9.1% in June 2022, its damage has already been realized and we are still well above the Fed’s target of 2%, likely to result in additional rate hikes. Even the introduction of this new bull market was induced by stellar returns of just seven tech companies, whereas most of the rest of the companies in the index are close to flat or even negative for the year. There is a fear that this has made for artificially positive market returns – a bull without horns.

So, what do we do with this mixed information? Do I plan to change my investment strategy? By no means! Why not? Making portfolio changes has historically resulted in underperforming the overall market. Rather, I share this information to temper expectations and prepare myself and others for what may come. Investment returns may be tremendously positive in the years ahead or we may experience another market pullback. We do not predict, we prepare. If I do not prepare for the range of possible outcomes, I am more likely to waver in my principles when things get tough. And they will get tough, it is only a matter of time. It is both good times and bad that the North Star of our investment decisions should be based on historical evidence. This allows us to tune out the noise and remain patient and disciplined while the bull and bear quarrel for cyclical dominance.