The stock market has been strong, earnings have been growing, but a commodity price surge threatens to derail consumer spending. What’s normal for the stock market during a recovery?
To look at historical averages, the first year of a recovery the market rises 30-40%, the second year 10-15%, the third year 5-10% and the fourth year stocks struggle.
The first year of this recovery the market roared, rocketing 60%. We need to think back to those times, though. In 2009 there were serious fears of a depression. Once those concerns had been allayed through TARP, stress-testing, and stimulus spending the market returned to recessionary levels about 25% higher.
So the first year’s return from these normalized levels was about 35%, right in line with historical averages. The second twelve months we saw a 16% return. So far in the third year the market has gone up another 4%, suggesting that historical patterns may continue. Interest rates are rising around the world (albeit slowly), profit margins are near their all-time highs, and economic growth is decelerating.
This suggests that while the bull may have further to run, its best returns may be behind it. There may be reasons that this cycle breaks the pattern, but we should keep a sharp eye out. Bulls are strong, but they don’t live forever.
Douglas R. Tengdin, CFA
Chief Investment Officer
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