On March 9, 2014, the S&P 500® Index reached an important milestone—the fifth year of the bull market. Since it’s bottom on March 9, 2009 during the global financial crisis, the S&P has risen a cumulative 178%. And it is quite an accomplishment: Of the 13 bull markets since 1928, only four have made it to their fifth anniversary, and only two went on beyond a sixth. The combined length and strength of the current bull market places it in the top five bull markets by both duration and cumulative performance—causing trepidation in some investors who worry the market might be nearing its peak.
It's important to put the current bull market into context. Although today’s bull market has been strong, it follows the third-worst bear market: a drop of 57%, compared to the bear-market average of 37%. It also took much longer for this bull market to return to the previous peak: more than four years, compared to a two-year average (and four-year lifespan) for all bull markets. On a round-trip basis (i.e., measuring performance since the previous bull market peak), the current market is 20% above its peak in 2007—slightly higher than the median round-trip return (though lower than the average). However, the bull markets that survived beyond their five-year anniversaries went on to post much higher returns.
Clues on what may be ahead
Although historical averages may provide some context, we believe that the economic backdrop—using the business cycle approach—offers much better clues about the outlook for stocks in the near term. Historically, different business cycle phases have tied closely to market returns. For instance, the early-and mid-cycle phases have shown the strongest economic growth and strongest market performance. Since the market peak in 2007, the U.S. economy suffered through a deep recession and has grown at a much slower rate than usual. Real GDP is now only 7% above its previous peak, while in previous bull-bear roundtrip cycles, the U.S. economy has ended an average of 24% higher.
The slow pace of expansion is probably prolonging the current business cycle. Read Viewpoints: April business cycle update. Some early-cycle sectors such as housing and financials took a long time to build momentum, and now provide more of an economic tailwind than usual at this mid-cycle stage. With the economy firmly in mid-cycle expansion and very few signs of late-cycle pressures, our outlook is for this business cycle to be unusually prolonged. If so, the U.S. economy’s fundamental support for the stock market may outlast historical averages.
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