US Stocks Approaching Bull Market

U.S. stocks are on the cusp of a bull market, one day after the Federal Reserve hiked interest rates by 25 basis points to slow inflation. 

Wednesday’s expected rate hike was taken in stride by investors who had seen bigger increases last year, including four-straight 75 basis point boosts between June and November. The U.S. central bank downshifted to 50 basis points in December and then to 25 basis points this week. 

Investors bid stocks up by 1% on Wednesday and another 1.5% on Thursday, even as Fed bankers warned that “ongoing increases” in the federal funds rate will be appropriate. 

As of midday Thursday, the S&P 500 was up nearly 17% from its October lows, close to the 20% threshold that many consider to be the start of a bull market. U.S. stocks’ last bull market ran from March 2020 to last June. The S&P 500 fell more than 25% between January 2022 to October 2022 as the Fed responded to sky-high inflation with the fastest monetary tightening in four decades. 

The decline of more than 20% put U.S. stocks into a bear market—a bear market that would be history with another 2%-3% rally in the S&P 500.  

Not The First Try  

This isn’t the first time the market has made a run at ending the bear. Between June and August, the index climbed more than 17%. 

But a few hot inflation readings and an increasingly hawkish Fed put an end to that rally, and eventually pushed the S&P 500 below its June lows in September and October. 

That said, the October lows were only a few percentage points below the June lows. Investors were unwilling to send stocks much lower with the U.S. economy growing. 

Indeed, despite widespread expectations of a recession in 2023, there are few signs that the economy is rolling over. 

That resiliency may be why U.S. stocks are reacting so positively to the Fed’s latest rate hike. 

If there are only one or two rate hikes left on the table, the chances of a soft landing—where inflation comes down and the economy avoids a recession—are pretty good. 

Another one or two 25 basis point rate hikes would be easily absorbed by an economy that experienced 425 basis points of tightening over nine months last year. 

Risks Lurk  

Still, despite investors’ current enthusiasm, risks to investments lurk. 

Economists like to point out that monetary policy operates with long and variable lags, meaning the consequences of the Fed’s rapid tightening until this point might be felt in the future.  

And as Fed Chair Powell pointed out in his press conference, despite recent positive signs regarding inflation, “the job is not fully done.” 

He pointed to continued elevated growth in prices for core, nonhousing services, as a reason for the Fed to keep monetary policy tight.  

Still, Powell said he ultimately expects that growth in prices for even those services will come down, and that the Fed will prevail in its fight against inflation without needing to inflict significant damage to the U.S. economy—a view that seems to be shared by U.S. stock investors. 

In the coming days and weeks, we’ll see whether that’s enough to push the S&P 500 into a bull market.  

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2