The Bull Market in Stocks Turns 2 Years Old

It's hard to imagine that just two years ago, things were looking... not so great.

The S&P 500 experienced a 27% decline at its lowest point on October 12, 2022, reflecting investor expectations of runaway inflation, mass job layoffs, and an imminent recession. 

Since then, inflation as measured by the Consumer Price Index has declined 67%, the US economy has added 5.2 million jobs to a record 159 million people employed, and the consumer remains undefeated.

Economists have shifted from arguing about a potential recession to arguing about whether the economy will experience a "soft landing" or "no landing", in other words: how fast the economy will grow from here?

And perhaps most importantly for you, the S&P 500 has gained 66% while the major bond index is up about 7%. Well done for staying committed to your investment plan amid all of the volatility. It's not easy!

A top question for investors now is: how long will these good times last? 

In the economy, I think for the foreseeable future. But in the stock market, I think it's time to temper our expectations, at least a little bit. 

On the economy:

Respected economist Mark Zandi from Moody's Analytics summed the current environment up best in a series of tweets recently. Here are some excerpts:

• "I’ve hesitated to say this at the risk of sounding hyperbolic, but with last week’s big GDP revisions, there is no denying it: This is among the best performing economies in my 35+ years as an economist."
  

• "The jobs report for September cements my view that the economy is about as good as it gets... One couldn’t paint a prettier picture of the job market and broader economy."

Zandi is encouraged by everything from a solid jobs market to inflation back below 3%, economic growth above 3%, and a financially stable US consumer that owns a collective $185 trillion in assets (stocks/bonds, cash, homes) and owes just $21 trillion in debt (mostly mortgages).

That's a healthy balance sheet!

On market returns: 

While I think the good times can continue to roll on in the economy, I think as investors, we need to temper our expectations for further stock market gains in the near-term.

Consider the S&P 500's calendar year returns over the past six years:

• 2019: +29%

• 2020: +16%

• 2021: +27%

• 2022: -19%

• 2023: +24%

• 2024 (Year-to-date): +21%

A lot of good news is already priced into the market. It's not priced for perfection, so there is more upside to be had, but any slight negative news will likely have an outsized impact on stock prices. Investors are looking for any reason to sell and take profits, so downward moves can be fast and furious (shoot first, ask questions later). 

Now consider the average stock market returns by year of a bull market:

• Year 1: +40%

• Year 2: +13%

• Year 3: +2%

With the bull market officially entering its third year this week, I do not think it will be a surprise if stocks catch their breath for the next 12 months and return something in the low single-digits. ¯\_(ツ)_/¯ 

This is not a call to do anything to your portfolio or change your financial plan. Stick to your plan, keep investing, and view any decline as a long-term buying opportunity.

This is a call to be mentally prepared that especially with the Presidential election less than one month away, it would not be out of the ordinary to see some choppiness in the stock market in the near-term.