Stocks one year after the bottom: Here's the good news, and the bad

Published Thu, Oct 12 20238:38 AM EDTUpdated Thu, Oct 12 20239:33 AM EDT

The S & P 500 bottomed out on October 12 last year with a close of 3,577. Since then, the S & P 500 has gained 22%. The good news looking ahead: the historic data indicates generally strong gains ahead. The bad news: the current situation may be so anomalous that historical trading patterns may have little meaning. Lopsided gains While the S & P has seen healthy gains off the bottom, the gains have been lopsided. The S & P's advance is is mostly a testimony to the strength of the large cap tech rally in the first half of the year. The average stock (reflected in the S & P 500 Equal Weight ETF ) is up only modestly in the past year, and small caps have risen a paltry 5% . Sectors since the 10/12/22 bottom Vanguard Mega Cap Growth ETF ( MGK ) + 38% S & P 500 Equal Weight ETF (RSP) + 11% Equity ETFs average gain: + 11% Small cap (Russell 2000). + 5% The future: good in theory Todd Sohn at Strategas noted that the year following 12-month lows (in this case, October 2023-October 2024) in non-recessions have what he calls "decent" returns. He counts 11 periods of notable non-recession declines in the S & P 500 since WWII. In the first 12 months from the bottom, the S & P has gained an average 28.7%, and in the following 12 months an average of 12.5%. Here's the wrinkle: this is assuming no recession. If that happens, all these models don't matter. There's a bigger problem: the gnawing concern that the circumstances that got us here are so anomalous that historic trading patterns may not matter much. "Covid really threw any form of historical playbook out the window," Sohn told me. Sam Stovall, chief investment strategist at CFRA Research and one of the best market watchers out there, agrees that this bull market has many characteristics that set it apart from prior bulls, including the Fed continuing to raise rates and the underperformance of small caps. "Some investors worry, however, that this bull market may have already ended due to the fallout from higher interest rates, oil prices, bond yields and the value of the U.S. dollar," he wrote to clients earlier this week. But Sam is undeterred: "We still think this bull market has legs," he said, citing the strong fourth quarter in pre-election years, and the widely-held belief the Fed is close to ending its rate-tightening cycle. "The S & P 500 has traditionally jumped 13% in the nine months after the last rate hike, bringing all sizes, styles, and sectors up along with it," he said. Ultimately, though, Sam falls back on market history: "Every S & P 500 bull market since 1949 ended only after recovering all that it lost in the prior bear market. This bull market has retraced 83% of the prior bear market decline." Money keeps pouring into short-term bonds and money market funds For the first time in decades, bonds and money markets are serious competitors for stocks. A lot of people seem very content to leave money in 5% money market funds, perceiving little risk/reward in owning stocks. One year since the bottom: where the money is going Equity ETFs: $317 billion Fixed income: $203 billion Money market funds: $ 1.1 trillion Source: Strategas Those inflows into fixed income are largely cash-like short term bond ETFs. There is now $6 trillion in money market funds, about the size of the entire ETF industry.