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March 9, 2010

Double your market-anniversary pleasure

Expect to see a deluge of stock market "anniversary" stories in the coming days. We've got not just one, but two major anniversaries: today marks the one-year anniversary of the current bull market (i.e., the market bottomed last year on March 9), and the 10-year anniversary of the 2000 market top is coming up within a week or so as well (though that one depends a little on which index you use to pick out the exact top).

Here are a couple of interesting factoids I saw yesterday perusing a few of the early versions of these stories:

Marketwatch's "Riding the Rally" tries to answer the question of what to expect in year two of a bull market. Lots of historical patterns to be found here.

During the second year, historically, stocks keep rising — though not as powerfully, said Sam Stovall, chief investment strategist at S&P Equity Research.
Small-cap and midcap stocks continue to outperform both large-caps and the S&P 500, which still do all right themselves, and higher-quality issues with stable and growing earnings trump low-quality names. Since 1949, Stovall said, small-caps have returned 22% on average in the second year of a rally, while large-caps rose 15%.

Ironically, as great as the past year has been for stocks (with the S&P up roughly 66% from the year-ago lows), that really isn't all that spectacular for first-year bull markets, at least relative to the size of the bear market that preceded it.

Stovall is upbeat about the broad U.S. market's chances for a sustained advance.

"First-year bulls tend to recover an average of 84% of what they lost in the entire bear market," he said, noting that this bull run has retraced about half of the loss. "So you could say that on a recovery basis, we have more room to go."
Moreover, since 1949 none of the 10 prior U.S. bull markets has ended in its second year — the shortest was 26 months beginning in 1966. Since 1932, the median length of a bull market has been 50 months, according to S&P. That said, between 1932 and 1947, four of the five bulls fizzled in two years or less.

CNBC is echoing the "Bull Market Survival Rate Increases After One Year" theme:

History shows that by simply passing that 12-month threshold, it will make it that much more rare for the advance to suddenly end.
The 13 bull markets since 1930 that have lasted more than a year have averaged, a total gain of 153% and a total length of 4.4 years, according to data from Bespoke Investment Group.

"Bull markets that pass the one year mark have almost always lasted two years or more," wrote Bespoke's analysts, in a note to clients on Friday. "The one bull that lasted more than a year and ended after 393 days was in 1948, and that bull only saw a gain of 24 percent, so it's nothing like the current one."

Who's responsible for this historical pattern? You are! (Or, perhaps your neighbors.)

But why is one year the magical milestone? Perhaps it is because it takes more than a year for a bull market to prove its mettle with the often stubborn and less nimble retail investor, which has sat out most of these gains in bonds. Once they are convinced, their money comes flowing in and provides at least another 12-month lift to stocks.

Of course, it could all be different this time. But the longer this advance goes on, and the more the economy steps away from the brink of what has been a brutal recession, the better the chances that this bull market holds its gains.

No, it's not all sunshine and rainbows out there. But things sure look a lot brighter than they did a year ago!