Investing

'This is the start of a new bull market': 3 months after hitting bottom, stocks are up over 40%

Twenty/20

The bear market that was record-breaking on the way down continues to defy expectations on the way back up.

Tuesday marks three months since the U.S. stock market's low during the sell-off caused by the coronavirus pandemic and resulting economic recession. At its worst on March 23, the S&P 500 had fallen nearly 34% from an all-time high on February 19. Three months later, as of midday June 23, this benchmark now is about 7% below that peak.

"This is the start of a new bull market," according to Peter Essele, head of portfolio management for Commonwealth Financial Network. Bull markets are commonly defined as gains of at least 20% from a bear market low.

Investors have the Federal Reserve to thank for much of the rebound. The central bank stepped in with unprecedented action to support markets and the broader U.S. economy, including slashing interest rates to near zero and buying assets like Treasury bonds and exchange-traded funds (ETFs).

Even as the daily number of new cases of coronavirus is trending upward, the stock market continues its rally. Here's how to put the moves of the past three months in context and what experts expect will happen next.

A new bull market may be underway … 

Through midday on June 23, the S&P 500 has surged more than 40% since its March low. That's the best three-month stretch for this benchmark since 1933, according to figures from FactSet. 

Even though the market has risen more than the 20% benchmark necessary to signal a new bull market has begun, some people on Wall Street remain skeptical. Only 37% of professional money managers believe a new bull market already begun, according to the most recent Bank of America Global Fund Manager Survey. Meanwhile, 53% say the surge since March is a "bear market rally," meaning stock prices are likely to fall once again.

Even so, Wall Street is already more optimistic. Strategists that CNBC surveyed now forecast that the S&P 500 will end the year 7.1% lower than it began, based on their median estimate as of late June. Back in April, they were forecasting declines of about 12% for the year.

To understand this optimism and the market's gains, it's important to remember how much has changed since March, according to Essele. 

"If you think back to three months ago, we were very much at the question of: Is this going to be an economic depression?" he recalls. Since then, Wall Street has tempered its fears about the severity of the downturn now to just a "mild" recession, he adds. Some experts believe it will be the quickest recession in history.

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While some people argue there's a FOMO — or, fear of missing out — dynamic that's pushing stocks too high too fast, Essele sees reason to be optimistic about the economy's recovery from the current recession. And various data, from hotel bookings to home sales, underscores that Americans are spending again, which is important because consumer spending accounts for about two-thirds of gross domestic product (GDP).

"To experience a shutdown due to a pandemic and still stay afloat says a lot about our economy," Essele says.

... but don't be surprised if there are more ups and downs

Now that investors have some distance between them and the big declines in February and March, they have the opportunity to learn from what happened — which is especially important for those who are relatively new to investing. 

One takeaway? "Out-of-the-blue things can impact the market pretty quickly," notes Greg Hammer, president of Hammer Financial Group. Continued uncertainty with respect to a second wave of coronavirus cases and how many Americans remain unemployed are likely to create further market turmoil in the months ahead, he adds.

"The challenge right now is there's no playbook for this," Hammer says.

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However, if you're decades away from retirement, there is good news: Volatility allows long-term investors the opportunity to buy stocks at lower prices, he adds. By deploying a strategy known as dollar-cost averaging, or regularly buying assets, you'll have an opportunity to buy when stock prices fluctuate. 

What's more, it's a good time to plan for the future. Hammer, and others, anticipate that tax rates will go up because the government will need to pay for the massive stimulus program. That makes some accounts, like a Roth IRA, more attractive now. 

Finally, you should reassess the amount of risk you're comfortable with in your portfolio, and determine the asset allocation — or mix of stocks, bonds, and other assets — that's right for you.

"Ask yourself: How did my plan hold up to this storm?" Hammer says. "This gives you a better opportunity to evaluate what a volatile marketplaces has on your future and what you're going to do to prepare."

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