What to know if the S&P 500 enters a bull market
Economic optimism in the U.S. and a rally in big tech stocks has the S&P 500 closing in on a bull market, and while some investors may want to act quickly, experts are urging caution.
The S&P 500 has climbed nearly 20 per cent since an October low, reaching the bull market threshold, a term used to describe a market where shares are climbing and thus encouraging buying.
Big tech stocks, namely Tesla and Apple, are driving the climb, combined with expectations of a U.S. Federal Reserve pause early next week.
While investors may rush into trading, some economists are holding on to a wait-and-see approach.
Mark Sebastian, chief investment officer at Karmen Line Capital, said investing could be tricky, as a potential bull market is propped up by so few companies.
“This rally has been so concentrated,” he toll BNN Bloomberg.
“This has not been a broad market rally, it's really been a rally of, I believe they're now called 'The Magnificent Seven,' where we've seen Apple, Google, Microsoft, Amazon, Nvidia, Meta and Tesla basically carry the market, while everything kind of flounders.”
Meanwhile, Brian Madden, chief investment officer at First Avenue Investment Counsel Inc., said the current conditions are atypical of a traditional bull market, in that the median stocks are actually down and the climb has been historically much slower than normal.
“We do need to be careful in making confident and bold declarations that a bull market has started,” he told BNNBloomberg.ca.
“I would counsel your readers not to make wild knee-jerk changes to their strategic asset allocations just because they think a new bull market has begun.”
Madden added that making quick announcements of a bull market can hurt investors, as the NASDAQ climbed 20 per cent several times in the early 2000s, but each time it fell below its previous low.
“That's not to suggest this is similar, but it's to say that there's precedent for strong bear market rallies,” he said. “For us, we're cautious because a lot of the things that you normally see at the start of a new bull market haven’t really fallen into place here, but we're humble and we could be wrong.”
Additionally, with most experts predicting a recession sometime this year, stocks are expected to drop.
“I think to expect that there's sort of an onward and upward thrust straight line up from here is too much to hope for,” Madden added.
Sebastian added that stocks could come quickly down in the event of a sell off and the markets correct.
“I think the best-case scenario would be the NASDAQ eases off (and) has a little time correction,” he said.
“Obviously, the bad scenario is money comes out of tech and doesn't move back and just moves the sidelines doesn't jump into the materials and that's where we get kind of just a move right back.”
With so few stocks buoying the market, Madden warns things could go sideways quickly if those companies were dealt a blow.
“It's not difficult to go bang, bang, bang, and put a bullet in seven stocks, even big ones,” he said. “It's stronger, more robust and sustainable when you've got broader participation.”
Outside "The Magnificent Seven," Sebastian is particularly bullish on Anheuser-Busch, as he says the company is on the other side of political controversy and primed for a bounce back.
“I think that Bud Light’s mistake is a trader’s opportunity -- or an investor's opportunity -- to profit and potentially dive in,” he said. “I don't think Target's quite there yet, but I think it's time to take a look at Budweiser. I think there's upside there.”
With files from Bloomberg News