The four-year Wall Street bull market: history is encouraging, bonds are worrying

The trend was mainly supported by strong growth in corporate profits and huge investments in technology infrastructure. And in this context, it is amazing to discover that the value of chip giant Nvidia jumped from $286 billion in October 2022 to about $5.8 trillion today.

This anniversary raises natural concerns because the bull market is starting to show signs of age – they don’t last forever.

However, history provides an encouraging picture regarding the fifth year of a bull market. Since 1957, all six S&P 500 bull markets that have celebrated their fourth birthday have had another bull run.

Keith Lerner, chief investment officer at Truist Advisory Services, thinks that the rally in the stock market “is still worth benefiting from the doubt”. He found that the average increase in bull markets since the 1950s is 184% in 4 years, and these markets tend to record the strongest performance at the beginning and end of the bull market cycle.

Veteran investment strategist Ed Jordani also provides data: six bull markets in the index since it began trading in its 500-share format in 1957, lasted at least four years. The bull market that began in October 1957 ended in December 1961, only seven weeks after the fourth anniversary of its founding.

The bull markets that started in 1982 and 2002 ended almost exactly when they turned five. The market that began in 1974 lasted a little more than six years, while the markets that began in 1987 and 2009 lasted more than 12 years and almost 11 years, respectively. That is, all six bull markets survived their fourth “birthday”, and five of them lasted five years or more.

From 7% increase up to 4 times

The returns after the fourth anniversary were also very different. According to Yahoo Finance, the S&P 500 increased by about 7% from the fourth anniversary of the bull market that began in 1957 to its peak, and by about 16% after the fourth anniversary of the market that began in 2002.

On the other hand, in the bull markets that began in 1974 and 1982, the index rose by an additional 37-38% after reaching the age of four. In the market that began in 2009, it even more than doubled after its fourth birthday, while in the market that began in 1987, it increased approximately fourfold.

The current earnings multiple, 26.5, is higher than the S&P 500’s 10-year average of 23.6, according to FactSet data. However, when looking at the profits that the companies are expected to show in the next 12 months, the index trades at a multiple close to the average of the last decade.

MarketWatch estimates that the prices support the possibility that the bull market will continue. In the fourth year of the rally, the increases in the S&P 500 resulted from growth in the companies’ profits and not from the expansion of the multipliers – the index’s future profit multiplier actually fell from about 23 a year ago to about 19 today.

Sticks in the rally wheels

What may cloud the market this year is the trend in long-term government bond yields. This significantly affects the returns of stocks over time, said Jordan Rizzuto, partner and chief investment officer at GammaRoad Capital. “When bonds offer yields that may be similar to those of stocks, but with significantly lower volatility expectations, investors may have a greater incentive to transfer funds from stocks to risk-free channels.” Risotto explained. “This competition for investors’ money could intensify and further burden the stock market.”

Lerner lists several other risks that could end the bull market before its fifth birthday: further tightening of financial conditions following interest rate hikes by the Federal Reserve and rising bond yields; geopolitical tension and, as a result, energy prices that will remain high for a long time; expectations that are too high for company reports, which may lead to disappointments; over-dependence on technology stocks, in particular on investments in artificial intelligence and the expansion of credit spreads on The background is the fear of the huge investment volume of the AI companies.

It is possible to recognize the importance of past data, but it is not recommended to rely only on it. Warren Buffett said it best: “If history alone were the key to financial success, librarians would be the richest people in the world.”