Last autumn, things were looking gloomy for owners of US stocks. On 13 October, the S&P 500 dropped to a 52-week low of 3,491.58 points, hitting rock-bottom after 2019-21’s bull market.
At its record high on 4 January 2022, the index peaked at 4,818.62. From top to bottom last year, it plunged by 27.5%. Yikes.
The bulls are back in town
On Friday, the S&P 500 closed at 4,298.86, having briefly risen above 4,320 earlier. This leaves the index 23.1% above its October nadir. Here’s how it has performed over seven timescales:
| One day | +0.1% |
| One week | +0.4% |
| One month | +3.9% |
| 2023 to date | +12.0% |
| Six months | +7.7% |
| One year | +10.2% |
| Five years | +54.7% |
Over all seven periods ranging from one day to five years, the S&P 500 has produced positive returns. This calendar year, it’s ahead by 12% — well above its long-term yearly average outturn.
What’s more, the above figures exclude cash dividends — hardly generous from US stocks, but they do boost long-term returns.
In short, after a brutal 2022, things are looking up for holders of US stocks. But might this be the ‘irrational exuberance’ that eventually led to the 2000-03 and 2007-09 stock-market crashes?
Beware the bear
When a stock market rises by 20%+ from a previous low, this is the usual definition of a bull market. But history warns that some bull markets actually turn out to be ‘false positives’.
Lacking a crystal ball or other fortune-telling device, I am unable to predict whether this is a fully fledged bull market or merely a sustained rally in an ongoing bear market. But if the latter, then it’s already the longest bear-market rally in modern history.
The longest US bear market since 1928 lasted five years, from 1937 to 1942 (taking in three years of World War 2). And the longest bear-market rally lasted more than seven months, from late March to mid-November 1938.
This market recovery has lasted eight months, already giving it the bear-market rally record — if it is indeed such a rally.
I worry about market breadth
As a contrarian investor, I get excited when share prices fall and worry when they rise too far, too fast. Like my hero Warren Buffett has said, I get “fearful when others are greedy and greedy when others are fearful”.
After this sustained rebound, the S&P 500 trades on 19.5 times trailing earnings, for an earnings yield of 5.1%. Also, it offers a modest dividend yield of 1.6% a year, which is better than nothing. To me, this looks pretty far from cheap, but also not crazily expensive.
What really worries me is the narrowness of this market comeback. Almost all of the US market’s gains this calendar year have come from seven mega-cap tech stocks. Strip out these high-fliers and the S&P 500 would be almost flat in 2023.
Furthermore, the VIX index — which measures S&P 500 volatility over the coming 30 days — dropped to 13.5 earlier this week. This is its lowest level since January 2020, weeks before the Covid-19 crisis crashed markets worldwide. Uh oh.
Summing up, I’m unconvinced that this US rally will last. Hence, as a veteran value and dividend investor, I will stick to buying undervalued FTSE 100 shares at reasonable prices for long-term gains!
