It has now been more than three-and-a-half years since the bull market began in October 2022. At that point in time, inflation was rising at its fastest pace in fifty years, the Fed was hiking interest rates, and ChatGPT was still a month away from being released to the public. Since then, the S&P 500 has more than doubled in value and the Bloomberg U.S. Aggregate Bond index has fully recovered.
While the world has changed considerably since then, the presence of market concerns in the headlines has not. Every cycle brings fresh challenges and raises questions about whether the time-tested principles of investing are still applicable. The reality is that each cycle is unique, with its own catalysts, innovations, and sources of uncertainty. And yet, the core principles of investing and financial planning have remained consistent across decades, continuing to point investors in the right direction this year.
Bull markets climb a wall of worry
Even though geopolitical developments continue to influence markets, the more important consideration for long-term investors may be the overall market cycle. With the market hovering near all-time highs, it is natural for some investors to worry about pullbacks and corrections. These events can occur frequently, with the S&P 500 historically experiencing four or five pullbacks of 5% or worse each year, on average.1 While they are never pleasant, long-term investing depends far more on historical patterns over years and decades. This is one reason why overreacting to market swings can be counterproductive, as it may leave investors poorly positioned relative to their longterm financial goals.
Investors often say that the market climbs a “wall of worry” on a regular basis. Over the past several years, markets have overcome high inflation, a banking crisis in 2023, geopolitical conflicts, the possibility of a Fed policy error, AI-related market concentration, tariff-driven volatility, and much more. None of these concerns are trivial, and yet through all of them, the market has performed well.
The chart above helps to illustrate this pattern starting from World War II. Over this 70-year period, bull markets have lasted far longer and generated larger gains than what has been lost in bear markets. Specifically, bear markets have typically lasted one to two years on average, whereas recent bull markets have run as long as ten years or longer. Even when market corrections occur during bull markets, the average decline is 14%, with the average recovery requiring just four months.
As an example, the bull market cycle that followed the 2008 financial crisis lasted nearly eleven years. Despite this, it is often referred to as “the most unloved bull market” because there was a constant stream of market and economic concerns throughout. In hindsight, it is easy to see that even when those concerns were legitimate, such as questions about the pace of the economic recovery or the size of the national debt, they did not justify changes to long-term portfolios.
Of course, the past is no guarantee of future results, and how quickly markets rebound depends on the specific circumstances. However, the historical record makes it clear that trying to react to every market move has, more often than not, caused investors to miss much of the gains that eventually followed.
A growing economy is the foundation for long-run returns
While the stock market and the economy are not the same thing, they are closely connected. Corporate earnings drive stock prices over the long run and ultimately depend on economic growth. This is why it is important to monitor the broader economic cycle, even as markets move on a day-to-day basis for many other reasons.
The current business cycle has technically been running two-and-a-half years longer than the market cycle. The last official recession, as determined by the National Bureau of Economic Research, was the brief but sharp contraction in response to the pandemic in 2020. Since then, there have been quarters of slower growth and occasional predictions of recessions, none of which have materialized.
Today, the economy remains healthy by many measures, despite three key areas that investors are watching carefully. First, oil price pressure, if sustained, could weigh on consumer spending and add to inflationary pressures. Second, the job market has slowed, particularly in areas such as technology, raising questions about consumer spending that has otherwise been robust over the past several years. Third, the size and scale of AI investments have prompted questions about whether a “bubble” is forming, which is understandable given that many of today’s investors have lived through both the dot-com bust and the housing crisis.
Bubbles are notoriously difficult to identify in real time, and history shows that not every period of elevated valuations ends in a dramatic collapse. So far in this cycle, unlike in past periods, earnings growth has supported valuations and many companies are making outsized investments out of their profits. For long-term investors, the key consideration is staying balanced across different parts of the market to benefit from growth while managing risk.
Stocks and bonds continue to complement each other
Every cycle naturally raises questions about whether traditional principles of portfolio management still apply. In 2022, when both stocks and bonds declined simultaneously due to rapidly rising inflation and interest rates, some investors questioned whether bonds still served a meaningful purpose in a diversified portfolio. Similar questions arose after the 2008 financial crisis, when bonds struggled in an environment of historically low interest rates.
Over the past few years, bonds have not only recovered but also provide meaningful income and portfolio balance. The Bloomberg U.S. Aggregate Bond Index has delivered positive returns in each of the past two years, helping to offset periods of equity volatility. International stocks and commodities have also contributed, providing additional diversification benefits.
This pattern is consistent with what history shows across cycles. Every period seems to raise the question of whether “this time is different” when it comes to the relationship between asset classes. In the 1970s, inflation challenged traditional portfolios. During the dot-com era, technology stocks became extremely popular despite a lack of corporate profits, making other sectors appear less exciting. In 2022, rising rates created simultaneous pressure on both stocks and bonds. There are echoes of all of these challenges in the current environment.
Each time, focusing on the principles of diversification and long-term investing has proven to be the right approach. As uncertainty persists and new headlines cause markets to swing, it is more important than ever to focus on the bigger picture.
The bottom line? More than three-and-a-half years into this bull market, the underlying principles of long-term investing remain as relevant as ever. Markets have consistently rewarded those who maintain balanced portfolios and stay focused on their long-term financial goals.
Footnotes:
1. The number of pullbacks is based on S&P 500 index price returns since 1980.
2. The average size of corrections and recovery time are calculated from S&P 500 index total returns, since World War II.
Advisory services are offered through Collective Wealth Advisors LLC, a Registered Investment Adviser with the SEC. For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have ap- proved, determined the accuracy, or confirmed the adequacy of this article.
