Low US Recession Risk Suggests US Bull Market Will Continue

Financial pundits this week highlighted the two-year anniversary of the bull market for US stocks. The news sparked debate about how long the party can last. Although the future is forever uncertain, the general consensus on Wall Street seems to be there’s nothing obvious at the moment that threatens to end the party.

The discussion inspired TMC Research to crunch the numbers on another metric for measuring bull markets: performance from the start of business-cycle recoveries until the next recession starts. The logic is that an economic expansion is the primary source of fuel that powers the engine of a bull market. With that in mind, here are some empirical observations in the historical record since 1970.

First, equities tend to trend higher during economic expansions. The main exception: the short-lived 1980-1981 expansion, when the stock market, after a sharp rally, ended close to unchanged. Otherwise, stocks rallied during the expansions over the expansionary periods for the past half century-plus.

Common sense suggests, and the historical record indicates, that the longer the expansion, the higher the stock market’s rise. For the two longest expansions since 1970 to date (1991-2001 and 2009-2020), the full-cycle returns are the highest: 232% and 181%, respectively, in cumulative terms.

The current expansion, which started in May 2020, is still relatively young, which suggests that it may have room to run. The average expansion since World War II is 64 months, according to the National Bureau of Economic Research, the official arbiter of US business cycle dates. The US economy has been growing for 54 months, which still equates with a below-average duration.

Assuming growth will persist for an above-average period suggests the market’s current 100% rise has yet to peak. Using the latest analysis implies that’s a reasonable assumption. TMC Research’s models are currently estimating US recession is low and that the upcoming third-quarter GDP report will indicate moderate growth.