I’ve said it before, and I’ll say it again. It’s possible that because we are still in the after-inflation drawdown from 2021, the move we saw in stocks isn’t indicative of a new bull market. Indeed, all of this could have been one massive bear market rally trap. Investors anticipating an extension of the environment that concluded 2023 should consider this possibility. And that’s not because I am a perma-bear by any means but because of logic. Despite recent equity market gains, gold and Treasurys continue to rise, indicating a non-traditional risk-on environment.
As I’ve mentioned previously, the Nasdaq 100 and S&P 500 remain below their inflation-adjusted all-time highs, indicating a real drawdown. While this doesn’t preclude the possibility of a new bull market, surpassing these previous highs would be a crucial milestone. Until then, caution should be exercised in assuming a sustained upward trajectory.
When you combine this with the Russell 2000’s lackluster performance (with the exception of the last two months of 2023), alongside the fact that small-caps aren’t even at new nominal highs, the conclusion remains the same. In about a week, the index will record a three-year total return of 0% despite two years of fluctuating within a range. Such stagnation is not indicative of a thriving bull market.
Is a Stock Market Crash Coming?
A market rally supported by a narrow group of stocks can be susceptible to sudden reversals, as the broader market may not participate in the gains. For a sustainable bull market to emerge, it is essential for a larger number of stocks across diverse sectors to contribute to the upward momentum. This can still happen, but what if this year ends up playing out the exact opposite? The breadth rally we’ve seen could suddenly reverse just as everyone believes it won’t.
The continued rise of gold and Treasurys further highlights vulnerability. These assets are traditionally seen as safe-haven investments. Therefore, this suggests that investors are still seeking refuge from uncertainty despite recent equity market gains. This dynamic indicates a non-traditional risk-on environment and could potentially limit the short-term potential of the market.
The Bottom Line
While the market has experienced recent gains, investors should remain cautious and consider the possibility of a bear market rally rejection. The Nasdaq 100 and S&P 500’s position below inflation-adjusted all-time highs, the still uncertain performance of the Russell 2000, and the potential return of narrow breadth all contribute to the need for careful evaluation of how 2024 plays out.
We are again back in the position of no one being prepared for what’s to come.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
