The rally in equities since the October lows has been hailed by many commentators as the start of a new bull market, but even a 20-plus per cent move can be a normal feature of a protracted bear market. This is nothing we have not seen before, having experienced 20-plus per cent rebounds in the 2000/02 and 2007/09 bear markets. Every bear market in the past, as an aside, had a reflexive rally off the oversold lows that followed the first leg down. So please, let’s not hyperventilate.

Since we are not “new era” advocates and believe that cyclical patterns tend to re-emerge over time, we take the view that we just experienced phase two of an extended bear market, rather than the beginning of a bull run. Phase three, which involves the long and drawn-out decline to the fundamental lows, still lies ahead of us.

Take note as to what helps define the end of a fundamental bear market: recession bear markets end 70 per cent of the way into the economic downturn and also 70 per cent of the way into the United States Federal Reserve easing cycle; only when the yield curve (2s/10s) pivots to a positive slope (140 basis points on average) do we see the alarm bell ring that the lows are at hand; and the equity risk premium (ERP) at sub-100 basis points is daunting math as market lows are only reached typically when that stock-bond relative yield differential reaches 400 basis points.

This year’s rally was purely driven by factors that tend to be brief in nature and non-fundamental, as in technicals, sentiment (animal spirits) and short covering. At true lows in the bear market cycle, we tend to see breadth improve much more forcefully than has been the case so far; we tend to see financials and the cyclical sectors outperform, and this has definitely not happened; and the small caps start to take leadership in a sign that investors are beginning to discount a return to accelerating economic growth. The same holds true for emerging-market equities as they too are a torque on improving economic growth — and that hasn’t happened either.

It is very rare to see growth take the lead from value early in a bull market cycle, which is exactly what happened in 2023. Ergo, this cannot possibly be the start of a new bull market, but rather a very serious spasm in the context of what remains a very long bear market phase.

Nothing moves in a straight line and the reality is that the S&P 500 has enjoyed some of its best multi-month performances in the context of what was still a fundamental bear market. The historical record is replete with examples of exactly what we are talking about here, underscored by Bob Farrell’s Market Rule No. 8 (“Bear markets have three stages — sharp down, reflexive rebound, and a drawn-out fundamental downtrend”).

At the onset of a fresh bull market, we normally see broad-based participation with the S&P 500 equal-weighted index outperforming the cap-weighted index by just over three percentage points. This has not been apparent thus far and the equal-weighted index has lagged the cap-weighted index by 9.5 percentage points. Moreover, since last October, the equal-weighted index has risen by 15 per cent, a far cry from the 25 per cent average once a true bull market takes hold. Small-cap participation is weak, too, with the Russell 2000 only up 10 per cent compared to 20-plus per cent when true bull markets start to rev their engines.

But we come back to the woeful underperformance of the financials because we can really only trust the longevity of a market upturn that follows the sort of intense drawdown experienced in 2023 once the banks and asset managers begin to show leadership. This has been lacking and a big challenge, in our view, to the “start of a new bull market” calls being published in recent months.

We add that the rebound in analyst earnings-per-share revisions that has the bulls salivating has been so feeble that the end-of-2023 estimates are still some 10 per cent below where the forecasts were at the start of 2022; and still 7.5 per cent lower now for the end of 2024 than was the case back then as well.

Bear markets end on deep pessimism that see earnings calls plunge to depressed levels. This definitely has yet to happen, in part because analysts are buying into the forecasts from the economists who work at their institutions that we are miraculously in a permanent state of a “soft economic landing.”

Similar underperformances were characteristics of the 2002 and 2008 bear market rallies we experienced, and served as critical information that, like today, it was too early to declare the end to the fundamental bear market. That is where we find ourselves currently, as we swim against the tide of a bullish consensus narrative.

David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.