Last week marked the two-year anniversary of the current bull market. It's been 24 months since the market bottomed out: back then, US inflation was above 8%, while here in the UK it stood at a dizzying 11% – its highest for 41 years. Contributing factors included domestic energy prices, which had increased by 27%, while the cost of food, non-alcoholic beverages and recreational and cultural activities had all risen substantially. The central banks of the US and the UK responded with their aggressive interest rate hiking campaigns.
This coincided with significant drops in the values of some of the world's leading stock market indices. The S&P 500 fell by 25% from its high, while the UK's FT-SE 100 lost 11%. The general mood was sulky, and neither equities nor bonds offered much in the way of resistance to the downturn.
The negative performance of both stocks and bonds in 2022 raised questions over the validity of a diversified approach. So is that traditional 60/40 balanced portfolio still appropriate? Historically, a balanced portfolio has rarely performed negatively beyond one year. In fact, a 12-month period of poor performance tends to be followed by significantly stronger returns in the following years. This has been borne out by the impressive returns we have seen over the last couple of years.
If anything, the rewards of 2023 and 2024 have reminded us that staying invested and tuning out the noise constitute a key principle, and will stand investors in good stead for reaping the benefits of the recovery that invariably follows any downturn.
The stock market environment has most definitely changed for the better since those bleak days of October 2022. Inflation in both the US and the UK is under control – back down to 2.4% and 2.2%, respectively. In the UK, it is expected to fall to below 2% when the September data is announced. This would be its lowest level since 2021.
Falling inflation has resulted in the central banks adopting a more dovish monetary policy stance – indeed, interest rates are already being cut. This is likely to continue throughout 2025, although the recent US jobs report and the strength of the American economy will mean that we may need to be patient for the rest of this year. Similarly, despite Andrew Bailey's recent assertion that interest rates were on a “downward trajectory”, it will most likely pause its cuts for the remainder of this year.
When it comes to the financial markets, following a significant fall and a period of widespread pessimism, a new bull market invariably begins. The S&P 500 Index has hit 45 new record highs over the last couple of years. US large cap stocks, meanwhile, increased 24% in the first year since the October 2022 low, and went on to gain another 35% in the second year. Needless to say, the Magnificent Seven have been the driving force behind much of these gains. These gains might look excessive, but they are in line with the historical average of the last 11 bull markets (going back as far as 1957).
As for the UK, the FTSE 100 Index has risen by around 20% over this period. This has been on the back of the factors mentioned above, as well as domestic events and the economic and corporate earnings recovery.
There are still risks lying in wait, and these could emerge to create further short-term volatility and even possible flash crashes. Geopolitical uncertainties in the Middle East, Eastern Europe and Taiwan could negatively impact this bull market rally. And then there is the US election in November…
History shows that the last 11 bull markets lasted an average of five years. Eight of those registered a rally lasting around three years, or thereabouts. This would suggest that the current bull market has further to run. However, it’s unlikely that year three will be a smooth ride.
In fact, investment returns tend to be more moderate, with stocks being buffeted on the crests of waves of enthusiasm and pessimism. Fundamentally, traders and investors will be on the lookout for growth, subdued inflation, falling interest rates and rising corporate profits. Any disappointments may be punished over the short term.
What is encouraging, though, is that the market leadership has started to broaden out beyond the winners of the last couple of years. While we expect many of the US mega-cap technology stocks to continue to deliver reasonable returns, there is growing potential for other stocks and sectors to rally as the economic backdrop improves.
Admittedly, valuations in the US might have limited wriggle room to grow from here. Corporate earnings will therefore likely need to carry some of the burden if the markets are to build on the last couple of years of gains. But this is not impossible, and the third-quarter earnings session has only just begun, so we will shortly have some insights into how the past 12 weeks have been for a number of businesses, including the Magnificent Seven – companies with which the market has been quite preoccupied of late.
Pessimism over growth, the spectre of recession and uncertainty around inflation have all but evaporated in recent weeks and months. In their place are economic resilience, easing price pressures and excitement over AI. Bull markets don't die of old age: recessions tend to spell their end, or just over tightening of Fed policy... or an external shock. The first two are now unlikely in the short term. But the world has endured a number of shocks in recent years. There are never any guarantees that another one might not be just around the corner.
Elevated valuations, geopolitical risks in the Middle East and uncertainty over the outcome of next month's US election are all factors which have the potential to create short-term volatility in financial markets. As always, however, any significant pullbacks should be seen as opportunities: the long-term uptrend is underpinned by solid fundamentals, and there is every likelihood that this bull market will continue into a third year and beyond.
