The stock market is full of cycles. There are prolonged down periods (bear markets) as well as prolonged growth periods (bull markets). Luckily, there are usually more of the latter, but the stock market has had its fair share of both.
On Oct. 12, 2022, the S&P 500 (^GSPC -0.04%) -- which many use to gauge the health of the U.S. stock market -- hit the bottom of the most recent bear cycle and began its bull run. In the two following years, it rose around 64%, far exceeding its losses.
With the current bull market now two years old, it could be a good time to look at what history says about a third year. (Spoiler alert: It should be music to investors' ears.)
How has a third year worked out for most recent bull markets?
Before I talk about historical data, I must stress that past performances don't guarantee what will happen in the future. Looking at historical data to see patterns and gain insight is always good, but you never want to take it as a certain predictor.
That said, history is on the side of investors when it comes to a third year in bull markets. Below is how the S&P 500 has performed after the 16 previous bear markets.
| Bear Market End Date | Length of Bear Market (Days) | S&P 500 Change | First-Year Return | Second-Year Return | Third-Year Return |
|---|---|---|---|---|---|
| 6/13/1949 | 363 | (20.6%) | 40% | 14.5% | 12.9% |
| 10/22/1957 | 415 | (21.6%) | 31.5% | 9.7% | (4.8%) |
| 6/26/1962 | 196 | (28%) | 32.7% | 17.4% | 2.3% |
| 10/7/1966 | 605 | (22.2%) | 33.2% | 6.5% | N/A |
| 5/26/1970 | 543 | (36.1%) | 44.5% | 10.2% | N/A |
| 10/3/1974 | 630 | (48.2%) | 34.6% | 21.2% | (7.1%) |
| 3/6/1978 | 531 | (19.4%) | 12.8% | 15.2% | 16% |
| 8/12/1982 | 622 | (27.1%) | 57.7% | 2% | 13.9% |
| 12/4/1987 | 101 | (33.5%) | 21.4% | 0% | (8%) |
| 10/11/1990 | 87 | (19.9%) | 28.8% | 5.7% | 14.3% |
| 8/31/1998 | 45 | (19.3%) | 37.9% | 3.7% | N/A |
| 10/9/2002 | 929 | (49.1%) | 33.7% | 8.2% | 6.6% |
| 3/6/2009 | 514 | (56.8%) | 68.6% | 15.9% | 3.5% |
| 10/3/2011 | 157 | (19.4%) | 31.5% | 16.9% | 14% |
| 12/24/2018 | 95 | (19.8%) | 37.1% | 15.4% | 28.1% |
| 3/23/2020 | 33 | (33.9%) | 74.8% | 5.4% | N/A |
| 10/12/2022 | 282 | (25.4%) | 22.4% | 33.6% | X |
Source: Carson Investment Research. N/A occurs when a full third year in the bull market isn't accomplished.
In the past 16 bull markets (not including the current one), 12 continued their run for a full third year. Half of those that made it a full third year returned double-digit percentage growth in that year. That's an encouraging sign.
Another good sign is the five consecutive months of positive gains the S&P 500 has had. That has happened 29 times since 1950, with 28 of those instances resulting in the index being higher a year later.
We could still be early in the current bull market
Two years in a bull market may seem lengthy (though I'm sure investors appreciate it), but that's still relatively young compared to historical bull markets. According to JP Morgan, the median bull market lasts 46 months, about three times longer than the median bear market.
If you've been on the sideline during the current bull run and are afraid you missed the train, you likely haven't. History is on your side, but more importantly, you want to avoid having that mindset because it often turns into trying to time the market.
The stock market is as predictable as a toddler with a marker. Waiting to invest because you think the stock market will drop or rushing to invest because you think it'll increase could be counterproductive and do more harm than good.
A better approach is to use a strategy like dollar-cost averaging where you put yourself on an investing schedule and stick to it regardless of prices at the time. This can take some of the emotions out of investing and offset the effects of volatility.
When it comes to the stock market, there's an old saying that has stood the test of time: Time in the market beats timing the market.
