Wall Street traders are popping champagne and toasting the two-year anniversary of a period of outsized gains known as a bull market.
This two-year mark is known in gift-giving terms as the cotton anniversary. And with US dollars made up of 75% cotton, traders are celebrating with the present they love most: cold, hard cash.
Since October 12, 2022, the S&P 500 has soared, rising 22% in the first year and adding another 33.7% in the second. The index has now recorded 44 all-time highs, lifting not only corporate profits but also everyday Americans’ retirement accounts and investments.
But can the party last?
Overcoming the odds
A bull market is a period in which stock prices rise by at least 20% after a decline, reflecting both investor confidence and expectations of continued economic growth.
What makes this bull market unusual is how much uncertainty and economic worry investors have had to contend with during its run. Stocks continued their upward trajectory in spite of the Federal Reserve’s interest rate hikes at the start, stubborn inflation, and war in Europe and the Middle East.
Today, things look rosier. Interest and inflation rates are falling, and while geopolitical threats remain, they are still mostly regional. Election years are also often good for US markets.
History is also on Wall Street’s side. Historically, bull markets recover around 194% of the previous downturn, according to Sam Stovall, chief investment strategist at CFRA. And since 1950, bull markets have averaged 61 months, or about 5 years, excluding the current bull market, according to Adam Turnquist, chief technical strategist for LPL Financial.
That means there might be room for this party to keep rolling – and there are signs it could.
Corporate earnings are expected to rise over the next year, said Quincy Krosby, chief global strategist for LPL Financial, in a note. Consumer spending is still edging higher, and the Fed is lowering interest rates, which should help cushion employment data. The AI revolution has also brought a new concentration of strong returns to the market, said Krosby.
“There’s no compelling reason that this bull should surrender to the always lurking bear, especially with an accommodative Federal Reserve, solid economic underpinning, and an earnings outlook poised for stable growth,” she said. “Taken together, the bull’s second birthday present augurs well for another year.”
Back to the bear
But before Wall Street gets too comfortable, traders should be prepared for some bumps in the road. While the first two years of a bull market often see significant gains, history shows that the third year can bring challenges, said Stovall. On average, bull markets entering their third year post a modest return of just 2%.
Even more concerning for celebrants is that every one of the last 11 bull markets that reached their second anniversary experienced some form of correction in their third year. All saw at least a 5% drop, with five suffering declines of more than 10% but less than 20% and three eventually falling back into bear territory, found Stovall.
Despite the risks, three of those 11 second-year bulls managed to post double-digit returns in their third year, proving that even if the ride gets a little bumpy, there’s still a chance to pocket some profit.
