Markets tend to confound and confuse the vast majority of participants. The current moment is no different as the economy faces a torrent of challenges such as slowing growth, high short-term rates, and falling but still way too high inflation. Add to this a steady stream of negative commentary from Wall Street analysts, economists, and companies that have resulted in outflows from equities and bonds and a consensus that 2023 will see a recession.

Given the contrarian nature of how markets often work, it shouldn't be too surprising that the S&P 500 (SPY  ) is up 16% from its October lows. Additionally, it may have been easy to rationalize the initial move higher off the October lows as a 'bear market rally' given that volumes were lacking and participation was thin.

However, the rally that began in the final days of last year as tax loss selling subsided has been of an entirely different nature. There is broad participation across the board, and volumes are quite healthy. On top of this, we are seeing new 52-week highs in many stocks and sectors which signals new leadership that is necessary to continue drawing in institutional money. Finally, we are seeing similar behavior as seen in the beginning stages of other bull markets such as underperformance from defensive stocks, while oversold sectors outperform.

Markets fluctuate all the time. But, these fluctuations can turn into trends if the fundamentals continue to develop in a favorable manner. One common occurrence at the start of a bull market is the dynamic of falling rates even while growth expectations improve. Typically, this happens because the Federal Reserve takes a dovish stance, and the economy bottoms and starts to turn around.

We are seeing the same thing happen at the moment but in a different way. Rates are falling due to inflation peaking even despite the Fed continuing to remain hawkish. As long as inflation declines, it's safe to say that rates have peaked and the Fed's hiking cycle is in its final innings. And, we have the economy improving at the same time which is supportive of earnings growth.

The jobs market continues to be strong and shows no signs of cracking. Q4 GDP came in at 3%. China's economy coming back online is also supportive of aggregate demand. Just like in the U.S. and China, Asian and European economies are seeing growth come back as well.

For these reasons, the weight of the evidence is suggesting that a new bull market may have begun.