Strategas Analysts Warn of Lower Returns in Third Year of Bull Market
As the current bull market approaches its second anniversary on October 12, 2022, analysts at Strategas are cautioning investors about potential lower returns in the third year compared to the first two years. Historically, third-year returns have averaged 4.8%, significantly lower than the 10.9% in the second year and 46.9% in the first year.
The firm points out that while the market has been strong recently, there are concerns going into the third year of the cycle. One major factor is the complex interplay between monetary policy, fiscal policy, and currency value. According to esteemed economist Robert Mundell, controlling all three simultaneously is challenging, and eventually, something will have to give, whether it's inflation, interest rates, or the currency.
Despite strong real GDP growth, lower inflation, and tight labor markets, a recession seems unlikely, but market expectations may be overly optimistic. Strategas warns that predictions of a 14% increase in S&P 500 operating earnings by 2025 and assumptions of multiple future interest rate cuts by the Federal Reserve may not materialize.
The firm also highlights potential challenges like deficits, deglobalization, decarbonization, and massive immigration that could impact assumptions of disinflation as we move into the next year.
As the bull market enters its third year, investors should be mindful of historical trends and current economic challenges to make informed decisions about their investments.
Analysis:
- Third-year returns in a bull market tend to be lower than the first two years.
- The interplay between monetary policy, fiscal policy, and currency value is a key concern.
- Despite strong economic indicators, market expectations may be too optimistic.
- Potential challenges like deficits, deglobalization, and decarbonization could impact future market performance.
- Investors should be cautious and informed about historical trends and economic challenges when making investment decisions.