The S&P 500 had one of their worst days in months on Friday, as President Trump threated higher tariffs on China and he accused them of “becoming very hostile.”
As of now, we don’t anticipate the trade war to heat back up, but one thing to note is stocks were probably due for some volatility. In fact, the S&P 500 went all of the usually volatile month of September without a 1% daily change (higher or lower) and had gone 33 days in a row without a 1% move, the longest streak since before Covid. Couple that with a five-month win streak and one of the best six-month rallies ever and the bottom line is stocks were likely due for some October volatility.
Some Good News
Yes, Friday was an ugly day, but don’t forget that the S&P 500 just had one of its best six-month rallies ever, up more than 35%. Yes, near term we wouldn’t be shocked at all if we saw a well-deserved pause after this huge rally and the current five-month win streak, but bigger picture, this type of strength isn’t what you see at the end of a bull market.
We found only five other times going back to 1950 the S&P 500 was up more than 35% in six months (using the first signal in a cluster). Looking at history, stronger-than-average performance would be perfectly normal over the next 12 months, as a year after such strong gains stocks have never been lower and gained more than 13% on average, which should comfort many nervous bulls who think recent strength may have been a blow-off top.
The Bull Market Turns Three
Can you believe it? The bull market turned three on Sunday. It might feel like a lifetime ago, but three years ago on October 12, 2022, the S&P 500 was down 25% from peak and in the depths of a vicious 10-month bear market. Investors may forget this now, but most of the high-flying technology and AI leaders right now were actually cut in half or more back in 2022. Many might recall the bear market of 2022 as a minor blip after the rally we’ve seen, but for those of us that were there, it wasn’t a fun time for investors. Interest rates soared, the Federal Reserve was hiking rates unlike anything seen in a generation, and inflation was rampant. Then a funny thing happened—stocks bottomed and have been climbing ever since.
Yes, the huge excitement over AI has been a big driver, but so has an incredibly resilient consumer, strong household and corporate balance sheets, inflation coming back to earth, a now dovish Fed, and record profits and profit margins. I went on record in November 2022 that the lows were in and a new bull market was upon us. Those comments were widely mocked. Most economists and pundits were saying a recession was imminent and the bear market wasn’t over. Thankfully, we stuck with our process. We did take a lot of arrows for going against the crowd, but as a result we greatly helped our Carson Partners and their clients.
Happy Birthday!
For those of us getting older, we like to say that age is just a number. Markets like to say that as well. In fact, looking at the 11 bull markets since World War II, the average one lasts more than five years.
Looking at the returns, this bull market is up a very impressive near 90% in three years. That sounds like a lot, but then you see the average bull market since WWII gained more than 191% and it again puts in perspective that this bull market might be younger than many think, and more gains are even likely. We like to say bull markets are like a cruise ship. Once they get moving they are hard to slow down and very hard to turn around. This time a year ago we said the bull market would make it to its third birthday and today we are saying the odds favor it’ll get to four. Here’s why.
Now What?
Going back fifty years, we found five other bull markets that made it this far. You know what happened with those bulls? They all lasted many more years, with the shortest bull market five years, two lasting more than a decade, and the average length at eight years. No, we aren’t saying this bull has another five years left to it, but we are saying be open to the possibility that this bull market could have much more left to it than you probably think.
This chart is one we’ve shared many times, as it is quite powerful and lives up to the expression a picture is worth a thousand words.
What About Year Four?
One thing we were on record for at the start of 2025 was to be on high alert for some volatility. We didn’t know it was going to be the near bear market we had around Liberation Day that did it, but the odds were high for as much as a 15% correction in our eyes. We noted many times that early in a post-election year you tend to see weakness and the third year of a bull market tends to be choppy and frustrating. It all suggested to us some type of shake-the-tree moment was likely the first six months of 2025.
Clearly, we saw that volatility and then some, after one of the two sharpest sell-offs in history in April that saw stocks down nearly 20%. But what could be next? The good news is the fourth year of a bull market tends to be quite strong, something we think could happen once again over the next 12 months.
Of course, markets are driven by what’s happening now and not by past history. Otherwise this would all be easy. But history does suggest what may be ahead, and often for good macroeconomic reasons, which is why we study it. Right now, even with Friday’s renewed trade fears (which may not be over), we believe there are enough good things happening in the economy to act as a buffer against the risks we’re seeing. That includes fiscal and monetary stimulus, massive AI spending, still strong consumer and corporate balance sheets, and strong corporate profits. We’re not saying things can’t be derailed, just that there are enough good things going on to pay heed to what market history is telling us.
All said and done, despite the shutdown, which looks like it has no immediate end in sight right now, stocks have some nice tailwinds going for them:
- Strong momentum after several months of strong returns, and momentum begets momentum
- Strong Q4 seasonality, which may be further supported by investors who have been dour on markets since April trying to catch up
- A slew of Fed rate cuts, despite elevated inflation and an economy that seems to be holding up even in the face of a cooling labor market, which is a recipe for inflationary growth as we move into 2026, providing a tailwind for profits (and stocks)
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