As This Bull Market Turns 2, Expect Lower Volatility but Slower Gains
2024.10.11 04:56
Saturday, October 12 officially marks the second anniversary of this bull market. It is hard to believe that only two years ago the closed at 3,577 as investors feared inflation was entrenched after wholesale inflation data unexpectedly ticked higher that day. Barron ran an article after the market closed titled, “Experts Say Disaster Could Be Near. Details Are Slim.” The next day, consumer inflation came in hotter than expected, and after an initial sell-off in the morning, stocks rallied to close up 2.6% on the day.
With the benefit of hindsight, this day served as an important reminder to pay attention when stocks no longer decline on perceivably bad news. Perhaps renowned investor John Templeton said it best, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
And roughly two years ago, it is clear a bull market was born. Since then, the S&P 500 has amassed a total return of 62% while registering 44 record highs. To say the rally grew on skepticism is an understatement. Stocks advanced against a backdrop of the Federal Reserve (Fed) continuing to raise rates until the summer of 2023, inflation proved anything but ”transitory,” jumped to 5.00%, and a war broke out in the Middle East.
For some cultures, cotton is a traditional gift for a second anniversary present due to its strength, comfort, and resilience, and for investors, this bull market certainly delivered those qualities gift-wrapped with a bow. As the chart below highlights, the second year of this bull market can be characterized as more of a catch-up year, after the S&P 500 only generated a 21.6% gain during the first year of its existence.
The trailing twelve months’ return of 33% brought the index right back to the average 24-month gain following a bear-market low. Low volatility has been another welcomed personality trait of this bull market. The maximum drawdown for the S&P 500 since its October 12, 2022, closing low has only been 10.3%, running below the average maximum drawdown of all bull markets of -14.2%.
Bull Market Progression: Returns & Drawdowns (1950-YTD)
Source: LPL Research, Bloomberg 10/08/24
Disclosure: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.
What’s Next?
Most bull markets remain bull markets into their third year of life. Since 1950, the duration of a bull market has averaged 61 months, excluding the current bull market (the shortest was 21 months, running from March 2020 to January 2022). Given the durability of most bull markets, we compared the annualized returns of each bull market to its duration (in years). As highlighted below, the current 27.2% annualized return is running relatively high compared to other bull markets. History implies that if this bull market continues, investors should expect positive, but likely more muted annualized returns going forward.
Bull Markets: Annualized Returns vs. Duration
Source: LPL Research, Bloomberg 10/08/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.
Summary
This bull market has been nothing short of resilient given the macro conditions it has faced over the last two years. While history has shown bull markets are durable, they are also not linear as most suffer double-digit drawdowns along the way. On a shorter-term basis, LPL Research suspects volatility could be elevated as the market approaches overbought levels with deviating market breadth, historical seasonal weakness in October during election years, and political and geopolitical uncertainty.
Based on this backdrop, LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains a neutral stance on equities. For more on our STAAC views and insight into the second anniversary of the bull market, check out LPL Research’s upcoming Weekly Market Commentary, scheduled to publish on October 14 at LPL.com.
