It's a bull market – even if it doesn't feel like it

If this is a bull market, it sure doesn't feel like it.

As stock markets around the world have seen an upward trend over the last year and a half, there is a palpable feeling that anything could go wrong at any moment.

The general mood is one of pessimism, and many market watchers are bracing for one bad inflation report to send financial markets reeling.

Canadian investors got a taste of that just this week when the latest consumer price data showed a renewed acceleration in inflation that is sure to make the Bank of Canada uneasy. So much for impending interest rate cuts.

And yet all the bad sentiments do not align with the underlying trend in equity markets, which impacts resilience on a global scale.

From Japan to Germany to the United States, national stock benchmarks have hit new multi-year or all-time highs in recent weeks. The S&P 500 hit its first record high in two years on Friday, rising 1.2 percent on the day to close at 4,839.81 points. This exceeded the previous record closing level of 4,796.56 from January 3, 2022.

And the gains have spread beyond Big Tech to a variety of sectors and smaller stocks.

As Josh Brown, CEO of US-based wealth manager Ritholtz Wealth Management, wrote in a recent post: “Not only are we in a bull market, this bull market is actually expanding and gaining strength.”

Think back to a few months ago, when pretty much the only thing that worked was a group of stocks called the Magnificent Seven.

Most stock benchmarks posted respectable gains at the time, with some even enough to reach the unofficial threshold of a bull market. The S&P 500 index, for example, rose 28 percent between its low in October 2022 and July last year.

But the experiences of many investors during this time did not exactly scream “bull market”. That's because the average stock didn't perform nearly as well as the overall market.

In the first ten months of the year, 72 percent of the stocks in the S&P 500 index underperformed the index itself. This is highly unusual, if not unheard of. Even stranger was the fact that even though the S&P 500 was up double digits, 57 percent of the stocks in the index were in negative territory.

Much of the mediocrity in the stock market last year was caused by the inexorable rise of companies like Microsoft Corp. MSFT-Q and Nvidia Corp. NVDA-Q obscured. This also applied worldwide. Through the end of October, the MSCI All-Country World Index, which covers 85 percent of the investable stock universe, recorded gains of about $3.5 trillion, almost entirely attributable to the Magnificent Seven.

Things changed around Halloween. As the global inflation crisis subsided, confidence in a soft landing grew. And with that, the false bull market became a real bull market.

Defensive sectors, which had been severely punished in a rising interest rate environment, began to make up some lost ground. The S&P/TSX Capped Utilities Index, for example, is up 10 percent since last October after suffering a decline that wiped out nearly a third of its value.

The market's favor has also shifted back to the beleaguered small-cap sector. The Russell 2000 index of U.S. small-cap stocks is up 16 percent since October, even accounting for a decline in recent weeks.

The rally has also spread widely geographically. The Nikkei 225 has risen 17 percent since October and hit a 34-year high just last week. The German DAX index reached an all-time high a month ago. Even the S&P/TSX Composite Index is up 10 percent.

However, there are few signs of the optimism that usually accompanies bull markets. Trillions remain parked in the safety of cash and money market funds. And Canadian consumers remain overwhelmingly negative about the economy and their own financial situation.

The Conference Board of Canada's consumer confidence index is barely above the lows of the global financial crisis and the COVID-19 pandemic.

Similarly, the Bank of Canada's latest consumer survey found worsening attitudes among Canadians about their personal finances, the job market and the economy.

Although the Canadian economy does have some serious weaknesses, they do not appear to be as significant as the mood in the country would suggest.

A similar trend took hold in the USA last year, with the negative mood apparently becoming detached from economic reality.

There is good reason to believe that inflation is driving the grumpy mindset. Watching purchasing power shrink has a strong impact on public perception of the economy.

Despite falling inflation, sentiment has not really improved. That's probably because the average Canadian doesn't believe the scourge of inflation can be defeated so easily. Bank of Canada surveys consistently show that consumers expect inflation to be around 5 percent a year from now. That's even higher than the current inflation rate.

Unless people believe that excessive inflation is about to end, they are unlikely to find much comfort in the bull market.