🥳 Happy birthday, bull market

Hey hey, happy Monday!

Happy second birthday to the bull market. Also, happy birthday to me.

Let’s celebrate with a little bit of optimism, shall we?

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A week ago today, I turned 33 years old.

My husband and I have been celebrating all week. We ordered our favorite Thai takeout and Nutella pie the day of, indulged on wagyu steak from Supperland on Friday, and threw a birthday bash featuring Italian food and fancy cheese for our friends on Saturday.

What can I say? Birthdays aren’t just a day in the Cox household. They’re a time to celebrate life, lessons and loved ones who helped you navigate another trip around the sun. Sometimes, that takes a week – or a month. TBD.

Today, I want to write about birthdays. But before you swipe away, thinking this will be yet another contrived reflection from a childless dog lady in her early 30s, let me assure you: this post isn’t about my birthday. Maybe I’ll have more to say in a decade.

Instead, I want to tell you about another birthday last week – the second birthday of this bull market.

A young, but tested rally that’s found strength in an unusual place: adversity.

On October 12, 2022, the S&P 500 closed at 3,577, a two-year low.

Since then, the S&P 500 – an index of the U.S.’ largest publicly traded companies – has careened 62% higher.

A classic bull market, if you go by Wall Street’s most accepted definition: when the price of a stock, index or security rises 20% or more from a 52-week low that eventually makes a new high.

And a fairly average bull market, if you compare its performance to other bulls over history:

Wall Street loves to debate the technicalities of bull markets (btw, read my colleague Ben Carlson’s excellent piece on this argument). If you look throughout history, you’ll notice a few familiar patterns among the longest and strongest stock market rallies: a growing economy, rising company profits, and climbing stock prices across your portfolio. True portfolio nirvana, right?

This bull, however, seems to defy those historical patterns. A few stocks have driven a significant portion of the S&P 500’s gains. Company profits declined for three consecutive quarters through the middle of last year. While the U.S. economy has consistently grown, certain sectors—like housing and manufacturing—have contracted.

The past two years haven’t been easy. But that’s exactly why this bull made it to its second birthday, and it may have enough fuel to make it through year three.

Bull markets represent a shift in psychology as much as they reflect changes in earnings and economic trends.

In this particular bull market, a blend of doubt and skepticism, along with hope for better days, has helped stock prices overcome numerous obstacles.

You know what I’m talking about. Inflation, tragic humanitarian crises, bank failures, the chorus of recession calls. Every headline over the past few years that’s made you shake your first at the clouds in the name of unprecedented times hasn’t killed your portfolio – only made it stronger.

Let me remind you how this bull began. In October 2022, the market was reeling after a UK policy-fueled panic swept through the global bond market. Inflation was 8%, and the Federal Reserve – those nerdy economic policymakers in DC – had just implemented a massive 75-basis point rate hike. Fed Chair Jay Powell was openly stating that he was willing to drive the economy into a crisis if it meant bringing inflation down.

Fear was everywhere, and it was palpable.

One measure of investor mood – the AAII survey of individual investors – showed that at the end of September 2022, people were the most pessimistic about the future of the stock market since the global financial crisis.

Yet the world didn’t collapse as it did in the mid-2000s. Prices became more affordable over time, the bond panic subsided, and the Fed stopped hiking rates. Slowly, people began buying back into stocks. Prices have risen, but there’s been an air of restraint.

Today, the economy is growing – even if at a slower pace than a year ago – and profits are rising. This bull seems to be settling into a more normal pattern after two years of adversity. The AAII survey shows we’re collectively more confident about the stock market’s prospects. I wouldn’t call the mood exuberant or reckless, though. Maybe this is the rare appropriate time to say cautiously optimistic.

While year three isn’t guaranteed, there is historical precedent. Since 1932, bull markets have lasted an average of 4.4 years, yet only nine of 16 bulls lived to see their third birthday. Bull market rallies have generally lasted longer since the 1970s.

If the Fed applies the right touch to the economy, we could be in for more good years ahead. With an average annual gain of 38% in a bull market, the bigger risk has often been missing out on the bull rather than buying right before a market peak.

There’s no magic number that tells us where the stock market goes next, or when this bull market will end.

But in general, bulls tend to die at the hands of an economic crisis that few people expect.

In this bull, everybody seems to be expecting a crisis.

Thanks for reading!

Callie

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