The prevailing narrative of the death of the bull market in U.S. stocks is, in fact, exaggerated. Recent market activity and the cyclical nature of market sectors suggest that we are not experiencing the typical signs of a late-stage bull market.
During bull markets, certain sectors often outperform at specific stages. However, the current market does not conform to this pattern. Sectors that historically excel at the end of bull markets have been underperforming, while those that typically struggle at this stage have been thriving.
Back in early April, I analyzed sector relative strength rankings to evaluate the market. At that time, I concluded that the rankings indicated the emergence of a new bull market rather than a bear market correction. Following that assessment, the S&P 500 rose nearly 12% and the Nasdaq Composite gained close to 20% by late July.
The accompanying chart displays the trailing three-month returns of the 11 S&P 500 sectors. Arrows highlight the best- and worst-performing sectors at the end of previous bull markets, based on average returns from 1974 onwards.
Interestingly, Energy and Communication Services, sectors that typically struggle towards the end of bull markets, have recently been top performers. On the other hand, Consumer Staples and Real Estate, sectors known to excel in late-stage bull markets, have been lagging. This deviation from historical patterns casts further doubt on claims of an imminent end to the bull market.
In conclusion, while skeptics may argue that the bull market in U.S. stocks is coming to a close, recent market behavior suggests otherwise. The sector performance does not align with established markers of a late-stage bull market. Investors would do well to consider the broader context before making rash decisions based on dire predictions.
Is the Upbeat Forecast Enough?
Despite the optimistic outlook for the sector’s relative strength rankings, there are warning signs that should not be ignored. The recent underperformance of Utilities and the outperformance of Consumer Discretionary are indications of a late-stage bull market. To better understand these counterexamples, let’s consider the rank correlation coefficient between the rankings of all 11 sectors’ trailing three-month returns and the historical average for the end of bull markets.
The rank correlation coefficient ranges from -1.0 to 1.0. A coefficient of 1.0 signifies an identical ranking, while -1.0 represents a perfectly inverse ranking. Currently, the coefficient stands at -0.01, indicating that there is no statistically significant correlation between the sectors’ current performance and the end of a typical bull market.
Even if the positive forecast for the sector rankings proves accurate, the stock market still faces the possibility of a severe correction. In fact, it wouldn’t be surprising to see further weakness in the market, as mentioned in my earlier report. One prominent analyst anticipates a correction ranging from 8% to 13% in the market averages, and so far, the S&P 500 has already declined by 4% from its late-July peak.
Despite the encouraging forecast, caution is warranted. The market’s susceptibility to a severe correction cannot be ignored. While certain sectors may be performing well currently, historical data suggests that this may not be indicative of the market’s overall health.
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