BMO Capital Markets’ US Strategy Comment report, published Wednesday, suggested that Year Two of the bull market should yield solid gains in a less volatile environment.
The S&P 500 increased by 21.6% in the first year of this bull market, slightly below the average of previous years but “quite orderly” given the daily price change volatility.
The index has historically gained an average of 11.1% during the second year of bull markets, much lower than the 38.3% average increase seen in the first year.
Price returns tend to be substantially less volatile during the second year based on daily price change volatility and the frequency of the big daily moves, the report said.
Technical corrections, however, also tend to happen on average within the second year.
The bull market from Dec. 4, 1987, to July 16, 1990, was the only one since 1945 where the second year outpaced the first in terms of performance, with 21.4% in the first and 29.3% in the second year.
In addition, BMO Capital Markets strategists said that during the second year of bull markets, price returns are usually less volatile, “with the standard deviation of daily price changes for the S&P 500 roughly 25% lower in year two versus year one.”
Also, the frequency of big moves (1% or greater) in either direction was typically lower in the second year when compared to the first year.
“And despite history pointing to lower volatility in the months ahead,” BMO strategists wrote, “we still believe there will likely be some choppiness along the way as the believability of the bull market continues to get questioned.”
Still averaging about 10% maximum drawdown in the second year of bull markets, investors in the S&P 500 “should remain active and disciplined when it comes to their investment process rather than being passive or reactive to shorter-term performance trends.”
