The 2020 market plunge caused by the onset of the coronavirus pandemic was brief relative to prior equity market tumbles, but it still classifies as a bear market.
Even when accounting for what has been some rocky action in May, domestic stocks are still in a bull market, the second year of a bull market, in fact. That time frame is relevant to investors for multiple reasons.
“The second year of a bull market is virtually always markedly different than the first. Most notably, equity prices move up at a much slower pace in the second year, with the S&P 500 rising by a median of 10.4 percent during these periods versus 40.5 percent across the first 12 months,” according to Nationwide. “In fact, the index has only once sped up in the second year of the cycle and has generally been weaker in the wake of stronger first year gains (note that the only time on record in which the S&P declined in the second year came on the heels of the record 121.1 percent post-Great Depression surge in the 1930s).”
Sector leadership is especially important in the second year of a bull market. That is to say that what’s hot right now may not stay that way.
“Market leadership tends to rotate in the second year, as well. Recall that financials outperformed the overall index by a whopping 76.8 percentage points in the first year of the 2009-20 bull market, but went on to underperform across the rest of the cycle. Similarly, IT led at the outset of the 2002-07 cycle before going on to trail the index the rest of the way,” according to Nationwide.
It’s probably too early to tell for certain, but as things stand today, this second year of the bull looks a lot like previous iterations.
“It is still early on in the second year of this bull market, but the choppier pattern in recent weeks and the partial rotation in sector performance are at least hints that the typical second year dynamics may be beginning to take hold,” added Nationwide. “Consumer discretionary and IT, both big outperformers in the first year, have been sizeable laggards since late March while previous underperformers health care and real estate have moved into the top half of the table. This is not to overstate these developments – the S&P is still up at a healthy clip since this cycle hit the one-year mark and big early winners such as financials and materials have continued to outperform – but a grinding phase is to be expected and there are at least some signposts that it may be close at hand, if not already underway.”
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