Wall Street is celebrating two years of rallying, and history shows that this is the beginning

Even at the end of 2023, the experts warned that the rally on Wall Street is on its way to an end. At JP Morgan, a 12% drop in the S&P 500 index is even expected during 2024, and at Morgan Stanley, 6% others expected stability, and on the other hand, Deutsche Bank and Goldman Sachs were the most “bullish” and expected an increase of 7% to about 5,100 points. But the American flagship index didn’t just rise, last weekend it completed a 22% increase since the beginning of the year, breaking the all-time record for the 45th time (compared to a historical average of 16 times a year). Last weekend was the second birthday of the bull market, since the gains began in October 2022.

Since the current bull market began, in October 2022, the S&P 500 index has registered a 62% increase and the Nasdaq 100 index, the technology index even overshadows it with a jump of nearly 90%. But the market has not risen continuously. The increases in the markets are even Once not really in a straight line and to enjoy the beautiful returns you have to hold on tight during times of decline. In these two years, the S&P 500 index managed to fall five times by 5% or more (including three times in the last year alone and one landslide at the beginning of August that caused a global panic), Twice out of that it was a drop of about 10%, the Nasdaq fell even more.

Although the pricing levels on Wall Street are considered relatively high compared to the past, various investment houses have raised the target prices for the index and even expect continued increases, also against the background of interest rates that are beginning to decrease worldwide, and especially the Fed interest rate that has already decreased by half a percent and is expected to continue to decrease, and therefore may help companies earn more and fuel the Wall Street. On the other hand, the prophets of rage in the American capital market warn that the danger of the bear market has not passed, that the current rally is too fast and that the market is stretched to the limit. So who is right? And what does history teach about the future?

Is the current bull market unusual?

The answer obviously varies depending on the measurement period, but the answers are pretty similar in the end. The American investment bank Stifel notes that since 1932 an average bullish period has lasted about 4.9 years – so the current rally, at least historically, is still considered short. On the other hand, by the way, an average bear market lasts 1.5 years. The Carson research company notes that since 1950 the time of the bull market has lengthened slightly to 5.5 years. And there is another line of calculations over different time periods that show between 3 and 5 or so years.

Even when looking at the height of the increases, it seems that the market still has somewhere to aspire. According to Stifel, in an average bull market the S&P 500 index rises by 178%, and in an average bear market a fall of 35% is recorded. In Hartford, who use the most conservative calculation method we have come across in measuring the bull market, with an average duration of 2.7 years, they are talking about an average increase of 115% in the S&P 500 index – still well above the current return of 62%.

Hartford points out that the longest bull market, by the way, was the one before the dot.com bubble burst in 2000. That bull market lasted for more than 12 years with an increase of 582%. The second longest bull market was the one after the global financial crisis of 2008. Since then the outbreak of the corona virus, the American index jumped more than 4 times.

What do the big banks expect going forward?

As mentioned, none of the biggest analysts and investment houses in the world saw this coming. And when the increases did not stop during the year, the major experts were forced to update their forecasts upwards. Goldman Sachs have raised their target price for the index several times this year and now expect that by the end of the year the index will reach 6,000 points and next year to 6,300 points (compared to 5815 at the end of Friday). They explained this by the increase in the profit margins of the companies in the index and the expectation of an increase in the profits of the companies in the coming years as well. In the bank’s estimation, the current macro environment supports the continued expansion of profit margins, and they cite, for example, the growth at a faster rate than expected in the US economy in the second quarter.

On the other hand, in the largest bank in the world, JP Morgan, they continued to be pessimistic last July and religiously adhere to their fear scenario according to which by the end of the year the index will fall to the level of 4,200 points, a decrease of almost 22% (and almost 30% from the current level), when in their opinion the scenario of a soft landing will not happen “and the fear of a hard landing is growing”. At the research company BCA research, they were even more pessimistic and expected a fall to the level of 3,750 points (a fall of 30% since then and 36% from the current level) and even a recession “at the end of the year or at the beginning of next year”. By the way, the market, seeing these horror predictions, yawned and refused to get excited and even continued to rise by another 8%.

In other words, if history repeats itself, it’s really not certain that we’ve reached the end of the market rises. The various bodies point out that bull markets last much longer than the current cycle of increases in the markets (even though the cycle that lasted from the Corona until 2022, the time when interest rates began to rise in the world, was shorter) quite a few analysts, as mentioned above, updated their forecasts upwards, and expect continued increases, mainly Against the backdrop of interest rate cuts, which are expected to help companies. If this is the case, two or more years of rising markets may be expected before the next crisis arrives.

Will the upcoming reporting season change everything?

These days the report season for the third quarter of the year opens, and the market is eagerly waiting to see if the Federal Reserve’s interest rate announcement from September (then it lowered the interest rate by 0.5% to 5%) will be reflected in the new forecasts.

The great concern of the pessimists on Wall Street is the pricing of the shares and the question of whether they justify the actual profits and revenues of the companies. Michael Kantrowitz, Piper Sandler’s chief investment strategist, noted in a conversation with Yhaoo Finance that “high prices in themselves are not the reason bull markets end. There has to be a catalyst.” He noted that the two common reasons for the market to stop are a jump in interest rates or an increase in unemployment, but these two reasons are currently not in sight. “The market is moving from an environment that is driven by the macro economy to one that is based on the fundamentals. What will determine whether the market will continue to rise is the companies’ profits.”

According to Scott Cronert of Citibank, “Much of what is priced into the markets is a so-called ‘soft landing’. There could of course be a surprise that no one sees coming, but right now it’s a bit harder to see where the next shock to the markets will come from. If things continue to play out gradually ( The cooling in the economic growth NA) the investors will be able to deal with some change”.

Blackrock’s explanation for the mystery of the market

And yet the question arises, how can it be that the markets are soaring while the geopolitical tension is only rising? A regional war is developing in the Middle East, and the war between Russia and Ukraine is not close to ending. Do the financial markets develop immunity to volatility in the geopolitical angle? At least that’s what the investment management giant Blackrock believes.

Last week, Ben Powell, the investment strategist in the Asia-Pacific region of Blackrock, was interviewed by the American CNBC network and presented a thesis according to which the markets are showing increasing resistance to upheavals in the global geopolitical environment. In Israel, senior economists tend to agree with the thesis, but add their own reservations.

Powell believes that in the situation that has arisen, “we have entered a much more volatile period on the geopolitical level in recent years, and the market is getting used to the events.” According to him, the stock market is becoming more efficient in risk pricing – reducing the implications of uncertainty accompanying conflicts, and focusing on factors that will affect the economy in the long term, such as the reduction of interest rates in the US or the stimulus package of the Chinese government. However, Powell emphasizes that Blackrock is still following the events in the Middle East, and in case they detect something that is starting to get out of control, they will be required to re-evaluate.

In general, the main concern at Blackrock today is to be under-invested and not over-invested in the markets. Powell points out that “in the US in particular, there is the issue of artificial intelligence (AI) that we call ‘superpower’, which continues to expand and grow, for example in the field of infrastructure and energy.”

As for the Chinese government’s stimulus program, which was announced a few weeks ago, Powell predicts that it will create an attraction for China in the short term, but in the long term he actually prefers the Indian economy. According to him, “In recent weeks, India has become the leader of MSCI’s emerging markets index, taking the crown from China”, however, he believes that the incentive package will encourage investors to return to China: “It is quite likely that some of the money allocated by investors in the world, for example to other regions in Asia, will be drawn back to China” .

And despite everything: don’t give up on dispersion

And what do senior economists in the local economy think about this? “By and large, I agree, the markets are quite indifferent to events that do not have a global economic impact,” says Modi Shafferer, chief strategist for financial markets at Bank Hapoalim. “What is currently affecting the world are mainly the economic data in the US which are still good, and especially the interest rate cuts.”

On the other hand, “It cannot be said that the markets are completely ignoring these events. When the Russia-Ukraine war started, the prices of goods in the world skyrocketed in a crazy way, this caused a sharp increase in inflation and led to interest rate hikes,” recalls Shaffer. As for the IDF and the war going on here, in his estimation “as long as it doesn’t have too much of an economic impact (on the world), then the markets are less concerned about it. If we hurt the Iranians in oil production or we go to something more serious, the markets will not be able to ignore it. Oil prices will jump and this will definitely affect the world markets.”

Kobi Levy, head of the market strategies desk at Bank Leumi, believes that in the local sector the war has an effect, which is reflected, for example, in nervousness (standard deviations) in the shekel-dollar trade, or in the risk premium of the Israeli government (CDS) which jumped and did not decrease. Levy points out that the capital market “already has enough experience to feel safe with the pricing of the possible scenarios. The markets react to events, but the geopolitical tensions are priced and have become something that the market has adapted to, therefore the volatility has decreased.”

What can the Israeli investor do in the current situation? Levy Malloumi recommends looking at two important points in time: the elections in the USA that will be held in early November, and the second is the date of the budget transfer for 2025 in Israel. . That is, to be invested in many countries and in many types of currencies,” suggests Levy.

“Diversification prevents sharp declines in the value of the portfolio. It is better to remain globally exposed through basket funds, both in stocks and in bonds. Bonds are currently generating an excess yield that has not been there for many years, thus balancing and providing a natural hedge within the portfolio.”