A broad stock-market rally Thursday had the S&P 500 officially exiting its longest bear-market run since 1948. Investors want to know if the move is for real or merely a fake out.

The S&P 500
advanced 26.41 points, or 0.6%, to end at 4,293.93 Thursday, its highest closing level since Aug. 16, 2022, according to Dow Jones Market Data. 

A close above 4,292.48 would mark a 20% rally off the bear-market closing low of 3,577.03 set on Oct. 12, 2022. That would meet a widely used definition of the end of a bear market.

U.S. stock market has built on its recent gains since last Friday when a surprisingly robust May jobs report, a resolution of the debt-ceiling deal showdown, and bets that the Federal Reserve will not raise interest rates at its next policy meeting sent the S&P 500 on track to exit bear-market territory.

Including Thursday, the S&P 500 had been in bear-market territory for 248 trading days, the longest run since one that ended on May 15, 1948, which lasted 484 trading days, according to Dow Jones Market Data. Historically, the average bear market has lasted 142 trading days.

“A strong expectation that the debt-ceiling deal will become law this afternoon (last Friday) upon President Biden’s signature is generating optimism among investors. While job and wage growth remained persistent in May, investors are focusing on the increasing unemployment rate reflected in this morning’s Employment Situation Report, which has boosted sentiment,” wrote José Torres, Senior Economist at Interactive Brokers. 

“The tick-up is fueling wagers for a Fed pause at its June 14 meeting, with odds of 72% favoring that outcome,” he said. 

Fed-funds futures traders priced in a 26.4% probability the central bank will lift its benchmark interest rate by 25 basis points at its June 13-14 policy meeting, according to the CME FedWatch tool. Last week, the market had priced in a roughly 64% probability of a quarter-percentage-point rate hike. 

See: The Dow is soaring because traders still see Fed on hold in June after blowout payrolls report

Quincy Krosby, chief global strategist at LPL Financial, told MarketWatch that Friday’s “widespread” stock-market rally is “exactly what the market is hoping for” as a narrow market leadership is considered by many market analysts as a missing piece of the recovery puzzle. 

The S&P 500 has risen 11.8% year-to-date, with a substantial portion of total returns being driven by a handful of large-cap technology firms such as NVIDIA Corp.
Alphabet Inc.
and Apple Inc.
after the recent burst of investor optimism in artificial intelligence has driven the surge in technology stocks.

The market-capitalization weighted S&P 500 is beating its equal-weighted counterpart
which has risen 2.5% year-to-date, by over 9.4 percentage points in 2023. That’s the biggest margin of outperformance year to date on record, according to Dow Jones Market Data. 

However, Krosby said the strong surge in tech that has been powering the S&P 500 and Nasdaq Composite
is finally spreading to the broader market as the jump in Russell 2000
the small-cap index, is confirming an “overall positive underpinning for the market.”

The Russell 2000 jumped 3.6% last Friday, logging its best daily performance since November 10, 2022, according to Dow Jones Market Data. The small-cap index shed 0.4% Thursday, but has risen 2.7% so far this week.

“Market needs to see that the rally is more than just those mega tech names, [but] in the broader market, especially the Russell 2000, because that’s so closely associated with distress in the credit markets and the banks. That helps confirm this rally,” Krosby told MarketWatch via phone. 

“If it were just those five names, I think investors and traders would be worried even though the ‘fear of missing out’ will get them in there, but to have this broad rally today is very helpful in terms of investor psychology and the tone of the market,” she said. 

The Dow Jones Industrial Average
finished up over 168 points, or 0.5%, to 33,833.61 Thursday, while the Nasdaq Composite jumped 1%, to end at 13,238.52

Caution is warranted. Analysts have noted that not all bear exits lead to lasting bull markets.

The S&P 500 has also been subject to fake bear-market exits, but with far less frequency than the tech-heavy Nasdaq Composite, noted Sam Stovall, chief investment strategist at CFRA, in a May note.

Of the 14 bear markets since WWII, only two — 2000-02 and 2007-09 –– suffered bogus bottoms, Stovall said. During the 2000-02 episode, investors saw two such fake-outs, but only one during the 2007-09 period.

The potential for such fake-outs explains why there’s far from a universal embrace of the 20% rule. Some analysts contend a new bull market doesn’t begin until the previous high is taken out, while others use more complicated criteria.

In One Chart: Why stock-market bulls must beware of ‘bogus bear-market bottoms’

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