August 2018 Market Update -The Longest Bull Market Ever? Not So Fast…
Written by Brian Johnson, CIO
Summary: This isn’t the longest bull market in history. In fact, it’s pretty average.
If you’ve picked up a newspaper or turned on the TV in the last few weeks, you’ve likely heard someone quoting statistics suggesting that this is now the longest bull market in history. I’ve had more than a few family members recently mention that to me. While “longest bull ever” makes for a great sound bite, it’s not exactly true.
The common Wall Street rule of thumb is that a 20% decline in the S&P 500 Index is required to officially declare that we are/were in a bear market. By that measure, our most recent bear market reached its last nadir during the Credit Crisis—way back on March 9, 2009, some 3,460 days ago. It’s been smooth sailing (with no official bear markets) ever since then, right? Or has it?
In 2011, the S&P 500 fell 19.3%, a hair less than that magic (actually quite arbitrary) 20% that qualifies it as a bear market. However, many other stock indices (both here and abroad) dropped far more than 20% during that same period, so much of the stock market clearly was in bear territory. More recently, from mid-2015 to early 2016, we saw declines (aka “drawdowns”) of 25% in small cap stocks, 33% in emerging markets, over 40% in China stocks, 35% in the biotech sector, and a staggering 70%+ in certain oil funds. Yet again, because the S&P 500 declined by only 15%, it was not considered a bear market in the press. In other words, whether an investor goes through a bear market clearly depends on what they own.
The real purpose of defining bear markets is to provide a framework for short and long-term investment decisions. We find that, in terms of market analysis, it is more useful to utilize a definition that is more broadly inclusive than simply watching to see if one market index of 500 stocks declines by 20% or more.
The method we utilize combines both time and price. That is because, psychologically, bear markets should involve time frames during which markets are working against you, not just the amount they drop. For example, a market that drops 20% in just 5 days—and then quickly rebounds and goes to new highs—leaves market participants with a very different feeling than a two-year downward slog that ends with the market down that same 20%. For that reason, we use bear market criteria defined more than 20 years ago by Ned Davis Research (NDR); specifically, a bear market requires either a 30% decline in the Dow Jones Industrial Average over 50 calendar days, or a 13% decline over 145 days. A 30% decline in the Value Line Geometric Index would also qualify. Under this more refined definition, both the 2011 and 2015-2016 markets described earlier qualify as bear markets.
Realizing that this definition is somewhat technical, you might wonder why it even matters. It matters because, if we are comparing current markets to history, it’s important to do so within the right framework. We’ve had a stock market that has moved dramatically higher since 2009. Many clients using our strategies, however, need cash far more frequently than once a decade, and they rely on us making certain investment decisions on a much shorter-term basis.
The table below refers to both cyclical and secular bull and bear markets. The difference is in how long they last. “Cyclical” bull and bear markets, often coinciding with economic cycles (hence the name) tend to last 2-4 years each. “Secular” market trends are much longer-term, typically lasting 15-20 years each. A secular bull market like the one we’re in, for example, includes several cyclical (shorter-term) bull and bear markets along the way.
Using the refined definition of a bear market that we stated earlier, we currently find ourselves in the midst of a cyclical bull market that began in early 2016. As you can see in the table below, this bull market, rather than being the longest bull market in history, is—both in terms of gain and duration—about as average as it can be. In fact, this bull market’s 715-day term hasn’t even reached the average term of 870 days for cyclical bulls within secular bull markets.
Perceptions influence emotions, and investors’ emotions often cause them to make impulsive (and sometimes bad) decisions. When someone on TV says that this is the longest bull market in history, and that it is therefore likely to plummet, it is human to be concerned or fearful. Part of our job is to evaluate facts in the context of the bigger picture, and what we know about historical precedents, rather than believing sound bites on TV.
The truth is that, amid all the current trade war rhetoric, no one knows when the next cyclical bear market will begin, but you can rest assured that we will take action as conditions warrant. Last month, we reduced our stock allocations from “overweight” to “neutral,” and if economic and market indicators show sufficient further deterioration, we will reduce stock exposure again.
Understanding that the current bull market is, in fact, well within historical norms helps us manage your investments and make prudent decisions, without falling victim to emotion. We hope that it helps you keep things in perspective and rest easier as well.