The Bull Market Is Still Young
The S&P 500 is up close to 25% on the year, making this one of the strongest election years ever. That right there is a big reason to be thankful. We remain optimistic that this bull market is alive and well, and are also thankful that this bull market is actually quite young, at just over two years old.
Looking at the previous 11 bull markets, we found the average bull lasted more than five years, suggesting even though this bull market is mighty, it could have plenty of time left. In fact, going back 50 years, once a bull market made it into its third year there were multiple years left every time.
Year One (and Two) of a Re-elected President Tends to Outperform
Did you hear we had an election recently? Yeah, you probably heard, but what you might not have heard was that the S&P 500 has done quite well in Year One and Year Two under a re-elected president (and better than under a new president). Feeling skeptical? Well, the four years under President Biden played out almost exactly according to script for a new president in office. Historically, year one does well (which we saw in 2021). Then year two is weak (think 2022 and the bear market). Finally, the final two years are strong (exactly what we saw in 2023 and 2024). No, we don’t say you should invest simply based on the presidential cycle, but we sure wouldn’t ignore it either.
The Dual Tailwinds
What drives long-term stock gains? It is earnings, and when you have an economy that continues to surprise to the upside, you tend to have solid earnings. We continue to think the economy looks pretty good and below are two reasons why.
Looking forward at 12-month S&P 500 earnings we once again see new highs, all the way up to $268, up from $225 in early 2023. Now that’s a reason to be thankful! There is no holy grail when it comes to investing, but when we saw earnings estimates making hew highs back in the middle of 2023, we took it as a big reason to be overweight equities and still do.
It doesn’t stop there though, as profit margins continue to trend higher and are at their highest level this cycle. Profit margins expanding and earnings hitting all-time highs are great dual tailwinds for higher stock prices.
Fed Cuts Near Market Highs are Bullish
Earlier this month the Fed cut interest rates with the S&P 500 near all-time highs. Here’s a chart we’ve shared many times before, but it is just as relevant now as it was then. We found 20 other times (back to 1980) that the Fed cut with the S&P 500 within two percent of an all-time high and stocks were higher a year later all 20 times and up an average of nearly 14%. As much as the Fed was a headwind in 2022 when they aggressively hiked to slow inflation, it has been a tailwind since July 2023 when they stopped hiking. Now, as this easing cycle continues, the tailwind remains strong, another reason to be thankful.
Why We Aren’t Worried About Higher Inflation
We’ve been on record for well over a year now that our country would see very strong productivity and that is exactly what has played out. Below is a snippet of what we wrote about productivity:
Productivity growth is also running strong – over the last six quarters, productivity growth has clocked in at a 2.6% annualized pace. That’s well above the 1.6% annual pace we saw between 2005 and 2019. This productivity boost is something we talked about a year ago, including in our 2024 outlook. As we discussed back then, a key factor here is a strong labor market. Workers who were hired back in 2021 and 2022 have gotten a lot more productive as they got trained and stay in their jobs (with relatively higher pay). Entrepreneurship is another likely factor boosting productivity, with new business formations running well ahead of what we saw in the last decade. New business creation also provides employees opportunities to switch jobs for higher pay. The good news is that strong productivity gains allow wage growth to remain strong, without creating inflationary pressures — this dynamic has been playing out over the past year and half and we expect it to continue into 2025.
The reality is some of the best years for the economy and stock market have been during periods of strong productivity, which makes sense since productivity growth is a key input to GDP. Last year for instance saw nominal Gross Domestic Product (GDP) up nearly 6% and we are now looking at back-to-back 20% years for the S&P 500, something we don’t think is a coincidence with productivity strong. The last time we saw an extended period of strong productivity? The mid to late1990s, one of the best periods ever for investors.
We hear all the time that should the Fed cut here, it could lead to higher inflation. Yes, that’s a worry, but again go look back at history. When you have higher productivity it allows for higher wages while putting a cap on inflation. It sounds like a perfect scenario, but we indeed saw a similar situation in the mid-1990s when the Fed cut, supporting productivity, and wage growth stayed strong but inflation wasn’t an issue. As long as productivity remains strong (like we think it should) the path is there for the Fed to continue to cut interest rates without having to worry about inflation soaring back.
We hope everyone has a great Thanksgiving with family and friends this week and just remember, there’s a lot to be thankful for! Thanks for reading.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
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