New bull market doesn't take recession off the table

Friday may have marked the end of the 14^th bear market since World War II, but financial advisors and market watchers are still generally urging caution and warning against falling prey to a head-fake stock market that's being driven higher by a handful of technology companies.

“It’s a narrow bull market being fueled by a handful of giant tech companies that we all are watching in amazement, but if you look at the broad breadth of the market, the Dow is still in bear territory,” said Eric Beiley, executive managing director of wealth management at Steward Partners Global Advisory.

The closely watched S&P 500 Index, which is up nearly 13% from the start of the year, reached the technical threshold of bull market territory on Friday, when it marked a 20% gain off its Oct. 12 low.

But as Beiley and others are pointing out, about 70% of the S&P’s gain this year can be attributed to a tight group of high performers from the technology sector.

Microsoft (MSFT) is up 37% this year, Apple (AAPL) is up 40%, Tesla (TSLA) is up more than 98%, Meta Platforms is up 120% and Nvidia Corp. (NVDA) is up 165%.

“We’re continuing to rebalance into higher-quality stocks,” said Matt Michaels, co-chief investment officer at Fidelis Capital.

While Michaels confesses to taking what the market is giving in terms of lofty returns, he is also keeping the bigger economic picture in perspective.

“Like many people out there, we started the year thinking the recession risks were higher, which is why we were relatively cautious,” he said. “We’ve been surprised by how resilient the economy has been.”

Michaels is closely watching the Federal Reserve along with other economic data, and he isn’t convinced the U.S. will be able to avoid a recession.

“We think the recession is delayed,” he said. "Consumers had quite a bit of excess savings from the pandemic, but we’re starting to see those savings being eroded, particularly at the lower-income end.”

Michaels points to last week’s slight uptick in jobless claims and the stubborn persistence of inflation on the services side as among the reasons to not get drunk on the notion of a new bull market.

“We think the Fed is likely to keep rates higher for longer because of stickier inflation,” he said. “We don’t think we’re out of the woods as far as recession goes, and I don’t think the stock market is properly factoring that in.”

Beiley is also mindful of the economic headwinds, and thinks a recession is still on the table.

“There are a lot of things to worry about,” he said. "I do think we’ll get hit by a recession, but it might be mild, and it might be later this year into next year. The impact on equity prices is uncertain, because typically in a recession you’d see weakness in equity prices.”

Kevin Brady, vice president at Wealthspire Advisors, said there's nothing about the transition from bear to bull market that would make him alter any investment strategies for his clients. However, he said, there's nothing quite like a bull market for getting clients enthused about investing and saving.

“For clients who are nearing retirement age, within about five years, a bull market presents a more attractive point to make a portfolio more conservative versus this point in 2022,” he said. “The point is not to try to time the markets, but clients are human and think about those things. So it can be a more palatable discussion.”