Stocktake: Third year of bull market may be tricky

The US bull market celebrated its second birthday last week, with the S&P 500 having doubled since bottoming in March 2020.

That's an extraordinarily rapid rise, notes LPL Research's Ryan Detrick, who looked at prior bull markets and how much they had gained by their second birthday. No other bull market rose so far, so fast – this has been a record-breaking rally.

However, the third year of bull markets is often a period of consolidation. Detrick notes that, historically, the best investment returns occur in the first year of a bull market, averaging gains of 41.8 per cent – not surprising, as stocks often overshoot to the downside during downturns, setting the scene for a rapid rebound.

Gains average 12.8 per cent in the second year of bull markets but fall to just 5.2 per cent in year three.

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Detrick expects the bull market to continue, despite the difficult global economic environment. Still, “some bumps in the road are normal”, he adds. “As the bull ages, year three could provide some of those bumps.”