HomeMost PopularA Shocking Wake-Up Call Awaits the New 'Bull Market'

A Shocking Wake-Up Call Awaits the New ‘Bull Market’

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The early 2000s were a tumultuous time for investors. The market experienced multiple rallies of 20% or more in the S&P 500, leading investors to hope that the worst was behind them. However, each time a rally occurred, it was followed by a stall or even a drop. This pattern serves as a reminder that a rally in a bear market is not uncommon and does not guarantee sustained growth. Currently, the S&P 500 is teetering on the edge of falling below the 20% threshold many investors have used to label the start of a “new bull market.”

An Ominous Signal: Yield Curve Steepening

Another concerning indicator is the re-steepening of the yield curve, specifically the US 30-year minus the US 3-month. In 2000, as stocks were falling, the yield curve was also declining, as the bond market anticipated a potential recession. If the yield curve continues to steepen today, it may suggest that stock market declines are still ahead of us. This could mean that last year’s rally may need to be retested or possibly even broken. While the liquidity injected into the economy and the market in 2020 may have been an outlier, the current market conditions warrant caution.

Valuations at a Turning Point

Multiple expansion, characterized by rising price-to-earnings (PE) ratios, was a feature of both the early 2000s and the present. The recent significant rallies in the S&P 500 have been driven by rising PE ratios, mirroring the pattern seen in the early 2000s. Furthermore, during the 2000 cycle, there was a shift towards a lower PE ratio accompanied by a rise in credit spreads. We are now witnessing signs of credit spreads widening, indicating a potential period of contraction for PE multiples in the coming months.

Tightening Financial Conditions and the Dollar

The strength of the dollar and rising yields on the Treasury curve are key drivers of financial conditions and credit spreads. A stronger dollar can slow global and domestic growth, while higher yields can dampen economic expansion. These factors increase the risk of default and demand higher discounts for high-yield debt, leading to wider credit spreads and potentially increased volatility in the equity market. The Federal Reserve’s approach to monetary policy and its impact on financial conditions will be critical in determining market outcomes.

Lack of Support: Fundamentals and Technicals

Additionally, the current market lacks strong fundamental support. The S&P 500 is trading at a higher PE ratio compared to historical averages, which suggests the market may be approaching a top rather than the beginning of a new bull market. From a technical perspective, the S&P 500 is on the verge of breaking significant support levels, and the 200-day moving average has already been breached. These technical indicators, combined with the lackluster fundamentals, point to potential downside risks for the market.

The 2000-2003 period taught us that market sell-offs do not always result in a swift recovery. The belief that every dip is an opportunity to buy may be a sign that the bear market is not yet over. It is imperative for investors to approach the current “bull market” with caution, considering the lessons learned from the past. The market’s trajectory may turn out to be deceptive, just like the illusory bull markets of the early 2000s.

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