Over the past few years, the New York Stock Exchange has looked more like Spain in July, as the running of the bulls has become a regular event on the world’s largest stock market.

The tech-heavy Nasdaq Composite Index finished above 20,000 for the first time during the Dec. 11 trading session.

Earlier this month, the blue-chip Dow Jones Industrial Average and the S&P 500 closed above 45,000 and 6,000, respectively—both record highs.

President Joe Biden has celebrated these substantial gains as several asset classes have rocketed to never-before-seen levels.

“The stock market going strong is a sign of confidence in America’s economy,” the outgoing president wrote on social media platform X in February.

In September, he touted his economic record by citing a “record high stock market” and “record high 401(k)s.”

Bitcoin recently surpassed the long-awaited $100,000 level.

In October, gold prices reached an all-time high of $2,800 and have hovered around $2,700 since.

This upward trend did not spring out of nowhere. The leading benchmark indexes have been on a tear since the coronavirus pandemic, though there have been bumps on the path toward this uncharted territory.

Since touching the bottom of the pandemic-fueled market crash in March 2020, the Dow Jones and the Nasdaq have surged by about 136 and 192 percent, respectively. The S&P has rallied approximately 168 percent.

“It appears even though stocks have risen significantly for two years in a row, more upside potential remains,” wrote Rob Haworth, senior investment strategy director with U.S. Bank Asset Management, in a note.

Got Cash

Americans hold record amounts of their assets in equities but also a significant amount in cash.

In addition to stocks, the public again fell in love with cash as money markets—short-term debt investments and cash accounts—became attractive.

For the first time in two decades, yields touched the 5 percent mark, providing investors with hefty risk-free returns.

Even billionaire Warren Buffett and his Berkshire Hathaway stormed into cash, accumulating a record-breaking $325 billion cash pile.

According to a September study by the Office of Financial Research, money market funds have remained a popular option for parking cash.

Cash inflows total nearly $7 trillion and have continued to receive sizable retail funds as the Federal Reserve cuts interest rates.

A Bear Tranquilizer

While retail traders and institutional investors may be swimming in an ocean of green ink, it might be easy to forget about the bear market—where stocks or indexes fall 20 percent or more—that occurred in 2022.

The stock market decline two years ago lasted nine months, and it was Wall Street’s worst annual performance since the 2008 global financial crisis. Many causes fueled bearish conditions.

Market watchers overwhelmingly anticipated a recession, driven by the Federal Reserve’s monetary tightening efforts that began in March of that year to combat inflation.

Additionally, investors were growing concerned over emerging markets—particularly China’s zero-COVID strategy—and the war in Eastern Europe.

By late 2022 and early 2023, euphoria began saturating the New York Stock Exchange’s trading floor. Investors became optimistic about global disinflation, central banks signaling lower interest rates ahead, and the AI boom stimulating the tech sector.

Inflation Distortions

When assessing the stock market, investors and analysts will shine a spotlight on nominal (non-inflation-adjusted) gains and typically overlook the inflationary effects.

In recent years, nominal gains have resulted in U.S. stock market records.

However, the numbers are slightly more conservative when the returns are adjusted for inflation.

For example, the five-year real (inflation-adjusted) returns of the Nasdaq and Dow Jones are 18 percent and 10 percent, respectively.

As inflation occurs—the Federal Reserve expanded the money supply by more than 40 percent in just 20 months from the pandemic—more money is necessary to purchase the same (or more) level of goods and services.

This diminishes the actual value of investors’ gains, requiring greater investment returns to try to keep up with the cost of living.

Hedge fund managers might not explore the inflationary effects on earnings. However, middle-class households seeking to retire with a handsome nest egg might need to consider this component.

Milton Friedman Revisited

Eminent economist Milton Friedman stated that monetary policy operates with a “long and variable lag,” meaning that the effects of the Federal Reserve’s actions may not be felt immediately.

Did the Fed’s response to the pandemic alter this decades-old concept?

Economists have debated the Milton Friedman rule now that the U.S. central bank provides forward guidance, telling the public what officials will do in advance. In the past, this was a guessing game for the financial markets.

“Forward guidance shortens the lag time between when the policy rate changes and when the effects of actual policy tightening occur,” Fed Gov. Christopher Waller said.

On March 15, 2020, the Fed slashed interest rates to zero percent and launched an enormous $700 billion quantitative easing program to cushion the economic blows of the pandemic.

A little more than a week later, the stock market reached a bottom and its upward climb was ignited. In the following years, asset values across the board surged.

Heading into 2022, the Fed started telegraphing that it would soon tighten monetary policy by raising interest rates and shrinking its nearly $9 trillion balance sheet.

Within weeks, investors prepared for this climate of higher rates and less accommodative policy, initiating the bear market on Jan. 3, 2022.

The financial markets’ behavior over the past few years may have prompted economic experts to reconsider the longstanding Fed-approved lag effect rule.

Looking Ahead to 2025

Can the U.S. stock market keep its gains intact? Wall Street is optimistic.

According to FactSet Insights, analysts predict the S&P 500 will finish 2025 at nearly 6,679, led by gains in health care (19.7 percent), materials (16.8 percent), and energy (16.7 percent).

“We remain optimistic, but we also need to be risk-mindful, especially in a year with so many crosscurrents at work regarding policy,” Liz Ann Sonders, the chief investment strategist at Charles Schwab, said in a note.