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The Tell: The new S&P 500 bull market is about to enter its second year. Now what?

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The S&P 500 index recorded its best 12-months of performance in the history of the index’s publication on Tuesday, a gain of 74.78%, following its spectacular bear-market plunge a year ago.

While the S&P 500
SPX,
-0.76%

closed modestly lower Tuesday, its overall climb during the pandemic adds up to the largest 12-month gain for the index since it began being published in 1957, according to Tim Edwards, managing director of index investment strategy at S&P Global, which owns the Dow Jones Indices.

But beyond the first anniversary of the U.S. stock-market lows hit during the onset of the coronavirus pandemic last year, the S&P 500 also could be poised for second banner year of gains.

“After falling nearly 34%, it took only five months for the S&P 500 to recover its losses,” wrote Ryan Detrick, chief market strategist at LPL Financial in a Monday note, referring to S&P 500’s plunge to a March 23, 2020 low from its prior Feb. 19, 2020 peak.

Its full recovery was marked last August with the fastest bounceback ever for the S&P 500 from a loss of more than 30%, while its gains for the year have outshone prior bouts of upheaval for financial markets.

“Things have come full circle now, as stocks have staged a furious rally, with new highs happening across the globe as the economy recovers at a record pace,” Detrick said. “To put things in perspective, the S&P 500 also lost 34% in 1987, but that recovery took 20 months to get back to new highs.”

Last year’s stock market rout began in the U.S. in February with the confluence of rising coronavirus infections and new restrictions on travel and business activities, which first pulled the S&P 500
SPX,
-0.76%
,
Dow Jones Industrial Average
DJIA,
-0.94%

and Nasdaq Composite Index
COMP,
-1.12%

down 10% into correction mode, and then quickly 20% lower into bear market territory.

To help stave off a financial crisis, the Federal Reserve slashed its benchmark interest rate to a range of zero to 0.25%, a level it expects to maintain through 2023, and restarted central bank bond purchases to the tune of $120 billion monthly. It also unleashed an unprecedented slate of pandemic lending facilities, including buying corporate debt for the first time ever.

After that, it took little time for the U.S. stock market to find its footing, with the S&P 500 entering its current bull-market run on April 8, 2020, according to Dow Jones Market Data. The Dow’s recovery began earlier on March 26, while the Nasdaq Composite followed on April 14.

A bull market in an asset occurs when its value rises 20% from its most recent low, while a 20% decline occurs when an asset falls by at least 20% from its most recent peak, according to Dow Jones data.

Bear to Bull

More bullish views on the U.S. economic recovery also began to solidify last summer as progress on the development of COVID-19 vaccines started to emerge.

By July, Moderna Inc.
MRNA,
-6.24%

was offering updates on its vaccine candidate and a month later, all three major stock indexes were hitting fresh all-time highs.

So now what? The U.S. vaccination effort has outpaced Europe, where German Chancellor Angela Merkel on Tuesday called the dominant U.K. variant of the virus a “new pandemic,” while also outlining stricter lockdown measures over the coming Easter holiday period.

But if history can be a guide for today’s market, the S&P 500 still could be poised for a second year of banner gains.

This chart shows first-year bull market gains averaged 41% for the S&P 500, following the six bear-market reversals of a magnitude of greater than 30% since World War II.

Bull markets, following more than 30% drop

LPL Research, FactSet

But the chart also shows second-year gains averaged almost 17%, while pullbacks averaged 10.2%.

Reflation phase

Mark Haefele, chief investment officer at UBS Global Wealth Management, said he expects risk assets to see more upside as the market enters a “reflation” phase of the recovery, in a note Tuesday.

The CIO also said investors should “hunt for yield,” while also bracing for high growth, rising inflation and low policy interest rates.

Yields in the investment-grade slice of the roughly $10.5 trillion U.S. corporate bond market were last spotted near 2.27%, according to the ICE BofA Corporate Index, up from a pandemic low of about 1.79% in January.

Investors have become worried about the potential for rising government bond yields to sap some of the lofty pandemic gains seen in the technology and high-growth sectors of the stock market, even though banks and financial companies could stand to benefit from the ability to charge more interest to borrowers.

Matthew Bartolini, State Street Global Advisors’ head of SPDR Americas research pointed out Tuesday that interest in value-oriented and cyclical areas of the market led $8 billion of new assets to flow into the Financial Select Sector SPDR Fund
XLF,
-1.40%

so far in 2021. The fund was up 12.5% on the year to date Tuesday, outperforming the S&P 500’s near 4.1% gain.

The 10-year Treasury yield
TMUBMUSD10Y,
1.626%

was near 1.637% Tuesday, after climbing seven weeks in a row to 1.729% Friday, close to its one-year high.

“While a pickup in volatility would be normal as this stage of a strong bull market, we think suitable investors may want to consider buying the dip,” Detrick said. “Vaccine distribution, fiscal and monetary stimulus, and a robust economic recovery all have our confidence high.”

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