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Bull run off to a robust start

March 24, 2021

Graph depicting changes in the S&P 500 in the first two years of bull markets

Source: Standard and Poor’s

The bear market of 2020 came to an end one year ago yesterday, giving way to one of the strongest recoveries on record. Specifically, the S&P 500 is up by 74.8 percent over the last 12 months, the best start to a bull market since the index more than doubled in the first year of the post-Great Depression rally and well in excess of the median 40.1 percent gain during these periods.

In general, a stronger start bodes well for the cycle as a whole. The bull markets that have gotten out of the gate the fastest – those in which the S&P has risen by more than 40 percent in the first year – have gone on to produce a further median increase across the remainder of the cycle of 99.7 percent versus 57.1 percent for those in which the index moved higher by less than 40 percent at the outset. More fundamentally, the prospects should be considered especially bright in this cycle given the solid underlying economic expansion and the very accommodative stance of monetary policy.

That said, it is to be expected that the year ahead will prove significantly less fruitful than the one just passed. The S&P has historically downshifted to a median rise of 10.4 percent in the second year of the cycle, as it has often slipped into a correction at this stage (the index has been in correction at some point in the second year of nine of the 12 bull markets in its history). In fact, there has been only one case (1987-00) in which the S&P has picked up speed in the second year of the cycle and only two cases (1974-80 and 1987-00) in which the rise in the benchmark eclipsed 20 percent during this time frame. Moreover, returns tend to be muted in year three, as well, with the index moving up by a median of just 3.0 percent, before gathering steam again as the cycle matures. It is simply difficult for the outlook to remain on the ever-improving path that prevails for a time as a recovery gets underway. There remains plenty of upside in this cycle, but its more grinding phase is likely close at hand.

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