Stocks are in a bull market.  What does that mean?

Stocks are in a bull market. What does that mean?

The S&P 500 index closed at a record high on Friday, surpassing its previous high point, set in early 2022. The gains show that investors overcame fears of rising interest rates and panic over a recession that governed stock trading for much of the period. the last two years.

Instead, they are now betting that a rate cut will help boost corporate profits, while the economy remains on relatively strong footing.

Although the S&P 500 has struggled to reach the record high – after struggling against it for weeks before finally breaking through it with a surge on Friday – the record should also end debate on Wall Street over whether if the recent race. the rise in stocks reflected a lasting change in sentiment, or whether it was simply a rebound that would fade as fears about the economic outlook returned.

To the average person, it doesn’t matter what label analysts give the stock market when it’s rising, but with the new high, they’ll hear a lot more about “bull market.”

Here’s what you need to know about the market now.

“Bull market” is not an official term. There is no governing body that says what it is or decides when it started (like there is with a recession). But on Wall Street, there are two common ways to apply the label.

A bull market is said to be confirmed when a major index like the S&P 500 climbs 20 percent above its most recent low. By this criterion, the bull market was confirmed in June, when the S&P 500 closed 20% above its October 2022 low.

But some were quick to reject that standard, calling it too easy for the market to meet. They use the second definition of a bull market, in which stocks must rise above their old high.

As of Friday, by both measures, the S&P 500 is in the midst of a bull market.

The current bull market began in October 2022, when the S&P 500 hit its most recent low. Since then, the index has swelled by about 35 percent.

A bull market can last more than a decade or a few months. Stocks are most often in a bull market.

The previous bull market lasted less than two years, starting in March 2020 and ending in January 2022. Before that, stocks were in a bull market that lasted nearly a decade, from March 2009, through the middle of the Great Recession, as of February 2020, as Covid-19 emerged as a global threat.

The index hit a record high on January 3, 2022, the first trading day of that year. Low interest rates and high consumer spending, fueled by stimulus checks and the rollout of coronavirus vaccines, have helped strengthen it.

“There was a euphoria around what we saw as post-pandemic life,” said John Lynch, chief investment officer at Comerica Wealth Management.

But days later, the Federal Reserve released details of a meeting suggesting it was worried about inflation and would begin raising rates to slow the economy. The index ended this week down about 2.5 percent, the start of a sharp decline that continued through October, when stocks were 27 percent below January’s peak.

The Fed launched its rate hike campaign in March 2022, which increased the cost of borrowing for businesses and consumers. Worried about a recession, investors dumped their stocks as the Fed gradually raised rates from near zero to a range of 5.25 to 5.5 percent, the highest in 22 years.

Data then began to point to a slowing labor market and inflation began to moderate. Investors began betting that the Fed was almost done with its campaign, and once the central bank signaled that it planned to cut rates in 2024, the decline reversed and stocks surpassed that old high.

Maybe nothing. Certainly, the fact that stocks are climbing is good news for those with 401(k) retirement plans, and even better news for people with large investments in the stock market (often higher-income Americans ).

But that track record isn’t likely to change the behavior of most investors, said Mark Wilson, a financial advisor at MILE Wealth Management in Irvine, California. Mr. Wilson advises his clients not to make decisions based on daily news in the financial markets, he said. Often, the announcement of a rise in the stock market raises fears of a certain decline.

“People imagine the stock market as a heart monitor that goes up and down, so some get nervous,” Mr. Wilson said. Even though the stock market misfires and doesn’t break records every day, it generally tends to rise over time, he added.

For those investing for the long term, Mr. Wilson said, what is important is the value of their assets at the time they need cash. Additionally, it is important to recognize that the S&P 500 is just one index; a pension or retirement plan will invest money in asset classes that may not all increase at the same time.

Higher stock prices can encourage businesses to expand, and for the 60% of Americans who own stocks, a bull market means they might feel slightly richer because their long-term savings are worth more. That might make them feel better about their financial situation, but what’s more likely to make them spend more is the size of their salary, according to Rupert Watson, an economist at Mercer, an asset manager.

“The most important thing for middle-income people is whether they have a job and whether their wages are increasing,” he said.

A bull market ends when stocks fall 20% below their last high – a period known as a bear market.

The last time the S&P 500 entered a bear market was in 2022, as investors rallied in the face of stubborn inflation and rising interest rates.

But even if stocks don’t fall that much, they could see some decline.

Inflation is moderating, but some analysts warn it is too early to declare victory. Prices rose 3.4% on an annual basis in December, down from a peak of 9.1% in 2022, but still above the Federal Reserve’s 2% target.

If inflation trends unexpectedly move in the wrong direction, the Fed may not cut rates as quickly as investors hope.

“The most important thing that could reverse the rise is if inflation does not fall,” Mr. Watson said.