Market Direction and Stock Trends

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Anatomy of a Bull Market

* February 14, 2017

Summary

• Long-term average stock returns smooth over the bull and bear markets that investors experience, and no two market cycles ever unfold the exact same way. Bull and bear markets can vary significantly in both duration and magnitude.
• But there are other characteristics of bull markets that can also differ in meaningful ways, such as velocity, sources of return, and investor experience.
• When it comes to analyzing bull markets, inflation, interest rates, equity valuations, earnings, and dividends all play a part.
• Assessing the current economic environment in the context of historical U.S. and international bull markets can help set better expectations and reduce the risk of surprises that can lead to emotional decisions.

A few days back, we found this “History of U.S. Bear & Bull Markets Since 1926” one-pager from First Trust. In our opinion, the graph is a nice visualization of market expansions and contractions over the last 90 years.

We’ve recreated the graph below. There are some slight differences in what we show vs. the First Trust data since we use a different data source[1] and stick to monthly data. We also go back to the beginning of the first bull market of the 20th century.

Over the period from 1903 to 2016, there were 12 bull markets in the S&P 500. The average bull market lasted 8.1 years with a total return of 387%. The average bear market lasted 1.5 years with a total loss of 35%.

The current bull market, which began in March 2009, is the 7th longest and the 6th strongest. For it to be the longest ever, it would have to continue through the fourth quarter of 2023. For it to be the largest ever, the S&P would have to return another 665%.



Data Source: Robert Shiller’s data library. Calculations by Newfound Research. Bull markets are defined from the lowest close reached after the market has fallen 20% or more to the next market high. Bear markets are defined from the last market high prior to the market closing down at least 20% to the lowest close after it’s down 20% or more. Monthly data is used to make these calculations. Past performance does not guarantee future results.

While this analysis is informative, it’s still an incomplete picture of the anatomy of bull (and bear) markets. Below, we will examine this same data from four other perspectives:

1. Velocity: How fast do bull and bear markets unfold?
2. Sources of return: How much of bull market returns are composed of inflation? Dividend yield? Earnings growth? Valuation changes?
3. Experience: What was the experience of an investor using a balanced 50/50 asset allocation during these bull and bear markets?
4. Context: How does the experience of bull and bear markets in the U.S. compare to other markets around the world?

. . .

Conclusion

While long-term average stock returns have been high, they smooth over the bull and bear markets that investors experience along the way.

These large directional swings have many characteristics that make them unique, including their durations and magnitudes. Velocity, sources of return, and investor experience have also shown significant variation across market cycles.

This current bull market has been slow by historical standards and has largely been driven by normalization of equity valuations following the financial crisis. Balanced investors have benefitted from declining interest rates, but saw muted up-capture since interest rates started declining from a relatively low level.

Putting the current market environment into context by considering other geographies can lead to a more thorough understanding of how to position our portfolios and develop a plan that can be adhered to regardless of how a given market cycle unfolds.

https://blog.thinknewfound.com/2017/02/anatomy-bull-market/

• DiscoverGold