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The 20% up rule — bull market vs bear rally

What can be concluded from the S&P 500’s rise amid tech mega caps, a missing recession (earnings or otherwise), and more

June 06, 2023 / 18:03 IST
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Now that the rally has topped 20%, is it a new bull market or simply a rally within an ongoing bear market?

Bull Market or Bust

Like a scratched record on repeat, market-watchers have warned that the rally in stocks — which was briefly proclaimed a bull market Monday after
rising 20 percent above its low from October — is too reliant on a handful of mega-cap tech firms and looks fragile.

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Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, put it this way: “Exuberance around artificial intelligence, along with a resurgent US dollar, has produced extreme divergence and concentration risk in the main stock indexes. Such narrowness is not what new bull markets are built on.”

Whether this is good or bad is subjective. Among investors, your answer will probably depend on how you are positioned. Points of Return discussed the S&P 500’s top-heavy concentration last Wednesday, and concluded that narrowness isn’t necessarily all that bad. In fact, history shows that equity upside has typically come from a narrow set of companies. Further, once the relative performance of these big gainers has subsided, the broader market has historically held up just fine — with gains outnumbering losses.