The S&P 500 has recently entered a bull market, raising hopes of further gains for investors. CFRA Research suggests that history indicates a potential “post-high five” scenario, with a possible 5% advance before a period of consolidation. While the S&P 500 has recovered from its recent bear market and surpassed its previous record high, it’s essential to analyze the trends and potential risks that may impact future performance.
CFRA Research explains that since World War II, there have been 14 bear markets. Out of these, 11 were classified as “garden variety bears,” with declines of 20% to 39.9%, and three were classified as “megameltdowns,” with declines of 40% or more. The most recent bear market fell into the garden variety category, lasting approximately 15 months from its October 2022 low and wiping out 25.4% of the S&P 500 value from peak to trough.
Post-High Five Patterns
Irrespective of whether the bear market was deemed a garden variety or a megameltdown, a post-high five move occurred once a bull market was confirmed. On average, the S&P 500 gained 5% over the subsequent two to two-and-a-half months. However, after this initial surge, the index experienced a decline ranging between 6.8% and 8.7%, depending on the type of bear market that led to the bull run. Importantly, these subsequent declines did not escalate into new bear markets, offering some reassurance to investors.
As the S&P 500 celebrates a new record high, it is worth noting that the market could potentially enter a period of consolidation. Sam Stovall of CFRA Research points out four instances in history when equities experienced pullbacks within two weeks of reaching a record. This highlights the possibility of short-term market volatility and suggests that caution is warranted, even in the midst of a bull market.
For investors to have lasting confidence in the market’s gains, CFRA Research emphasizes the importance of extending the rally to other sectors. Currently, the S&P MidCap 400, S&P SmallCap 600, and Russell 2000 are all more than 10% below their previous record highs. For a more comprehensive market recovery, these sectors must also exhibit upward momentum. Achieving this would not only bolster investor sentiment but could potentially trigger a positive full-year expectation, further solidifying confidence in the market’s trajectory.
While the S&P 500’s entrance into a bull market is an encouraging development, investors must approach the situation with a mix of optimism and caution. Historical patterns suggest potential gains in the short term, but also the likelihood of a subsequent decline before returning to a more stable trajectory. Market consolidation and sector-wide recovery are key indicators to watch for future sustainable growth. By analyzing past bear markets, identifying patterns, and remaining attentive to market dynamics, investors can make informed decisions to navigate the evolving landscape of the S&P 500.
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