Friday, October 13, 2023
- The S&P 500 wrapped up the first year of the bull market yesterday. While the 21.6% gain was historically underwhelming, it is understandable given the challenging backdrop of global tightening, surging interest rates, elevated equity valuations, sticky inflation, and imminent recession calls.
- History suggests this bull market could have more room to run. Average and median 12-month returns for the S&P 500 have averaged around 13% to 14% during the second year of a bull market, with all 14 occurrences posting positive results.
- Don’t expect a linear path higher as maximum drawdowns during the second year of a bull market vary greatly, ranging from -6.2% to -33.9%.
Yesterday marked the one-year anniversary of the bull market. The S&P 500 has come a long way since the October 12, 2022 closing low and faced a lot of skepticism along the way. Continued global monetary tightening, surging interest rates, elevated equity valuations, sticky inflation, and a steady stream of headlines pointing to an imminent recession have been just a few of the headwinds for stocks to overcome. Nonetheless, the S&P 500 prevailed and posted a 21.6% price gain over the last 12 months.
While investors have applauded the transition to a bull market, performance during the first year points to more of a golf clap than a standing ovation. The chart below highlights the S&P 500’s average and median progression off all bear market lows going back to 1957—when the modern design of the 500-stock index was first launched. One standard deviation bands around the average progression are also included to highlight the variance in performance.
From a historical context, the first year of this bull market has underwhelmed in terms of upside. The 21.6% price gain ranks as an outlier year and the second-lowest 12-month gain off a bear market low since 1957. For additional context, average and median 12-month returns for the S&P 500 off a bear market low have been 39.6% and 33.7%, respectively.
With the bull market’s one-year anniversary party now over, we looked ahead to see how the S&P 500 has historically performed during the second year of a bull market. The table below— ranked by lowest-to-highest first-year returns—highlights the index’s average and median returns during the second year of a bull market.
History suggests this bull market could have more room to run. Average and median 12-month returns for the S&P 500 have averaged around 13% to 14% during the second year of a bull market, with all 14 occurrences posting positive results. Of course, do not expect a linear path higher as maximum drawdowns during the second year of a bull market vary greatly, ranging from -6.2% to -33.9%, averaging out to -16.3%.
In terms of progression, the S&P 500 has some catching up to do in the second year of this bull market. As shown below, the S&P 500 is currently tracking below the one-standard-deviation band of the historical progression off a bear market low. The index would have to climb another 35% over the next 12 months to reach the average and median two-year bull market returns of around 57%.
The S&P 500 has wrapped up the first year of the bull market with a gain of 21.6%, underwhelming from a historical context but respectable given the challenging macro backdrop over the last 12 months. While some of these headwinds are still blowing, we expect them to recede as the bull market progresses into its second year. Notably, the Federal Reserve is expected to end its rate-hiking cycle as inflation cools, taking some upside pressure off interest rates, which have been in the driver’s seat for stocks all year. History also suggests this bull market may have more room to run. Average and median 12-month returns for the S&P 500 have averaged around 13% to 14% during the second year of a bull market.
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