Compared to long-term averages, the market's a bit ahead of its bullish schedule for 2023. Specifically, by mid-June the S&P 500 (^GSPC 1.20%) is usually only up 3.3% for the year. This time around, it's up more than twice that amount. Indeed, the index is now up a hefty 18% from October 2022's low, and testing even higher highs.
But the sheer scope of the gain begs the question: Is there any room for the S&P 500 to tack on more gains in the immediate future? After all, chatter of a recession is still being kicked around by the experts.
Don't sweat it. As long as you're long-term-focused, now's a fine time to step into new positions.
3 things working in the market's favor
Don't misunderstand. Timing your entries and exits to the market's ebbs and flows is still generally a bad idea. That's not what this is, though; stocks may even have some more downside to dish out before all is said and done. Rather, this bullish green light is rooted in the (much) bigger picture. Three particular details of this bigger picture need to be examined.
The first of these nuances is inflation. In short, it's cooling off. While still well above long-term norms, last month's annualized U.S. consumer inflation rate stood at a two-year low of 4.9%, and is still sinking. Producer (factories, assemblers, and other production facilities) inflation fell to a modest multi-year low of 2.3% in April, nearly in line with the Federal Reserve's target.
It's a bit too soon to say we're completely out of the woods yet. But things are certainly moving in the right direction on the inflation front. It matters simply because rampant inflation has been one of the economists' chief concerns since early last year, as it can slowly grind the economy to a halt.
Abating inflation isn't the only economic detail to be bullish about, either. Earnings growth remains in the cards as well.
Although the comparisons are relatively easy ones -- to a time when the world was still easing out of COVID-19's worst effects -- progress is progress. Last quarter's earnings for the S&P 500 are on track to roll in a little more than 8% higher than the year-early bottom line, and things should accelerate from here. For the full year, forecasters are calling for earnings growth of 11.1%, with 11.6% profit growth projected for 2024.
Data source: Standard & Poor's. Chart by author.
Based on these earnings projections, the S&P 500 is currently valued at only 18.9 times this year's expected profits, and less than 17 times next year's expected earnings. That's about as cheap as the broad market's been in a long, long while.
Data source: Standard & Poor's. Chart by author.
Last but not least, now's a reasonably safe time to step back into stocks because the bear market has likely run its full course.
This is a highly controversial claim, to be sure. Some aspects of the economic backdrop still seem wobbly, and besides, bear markets don't necessarily adhere to an exact schedule.
Except they kind of do.
See, most bear markets coincide with recessions, and most recessions start with an earnings lull following unsustainable economic growth (and inflation is a common characteristic of overheated economies). Once the red flags begin waving, agencies like the Federal Reserve, the U.S. Treasury, and even Congress move into action with stimulative measures.
It takes time for these efforts to take hold, but since World War II, the amount of time required to turn the economy around is a surprisingly short and relatively consistent average of around 10 months. Given how bear markets start predictively before recessions take hold, it makes sense that the 12 bear markets since WWII have lasted an average of about 14 months, according to numbers from brokerage firm Charles Schwab.
The S&P 500 peaked and started a bear market in January of 2022, a little over 16 months ago.
It doesn't really matter in the long run
OK, maybe falling inflation and the sheer passage of time won't accelerate profit growth straightaway. The S&P 500 may well be due a move below October's bottom. No two recessions or their corresponding bear markets are ever exactly the same, after all.
The thing is, if you're a true long-term investor, none of this really matters. The stock market's got a great long-term track record, boasting far more up days than down days, with bull markets lasting far longer -- and moving much further -- than bear markets do.
So, if you're on the fence about stepping into new positions, know that the bigger risk isn't the risk of suffering more downside. The bigger risk is (still) missing out on the market's long-term upside. Don't talk yourself out of what could end up being a very rewarding decision five and 10 years down the road.
