Kevin B. Murray, BridgeTower Media Newswires
As the current bull market nears its ninth year, the question is: are we near the end of the long bull market? A bear market is generally considered to be a 20 percent or larger decline in the markets.
If we use history as our guide, it is not a question of if we are going to see a bear market but rather when will it start, what might cause it, and how long and deep will it be.
In March of this year the current bull market will be nine years old. If we use the historical performance of the S&P 500 Index from 1926 to now, we see the average Bull Market period lasted nine years and had an average cumulative return of 480%. The average bear market lasted just 1.4 years and had an average cumulative loss of 41%.
The bull market is measured from the lowest S&P 500 Index close reached after the market has fallen 20% or more to the next market high.
The bear market is from when the S&P 500 closes at least 20% down from its previous high close to the lowest close reached after it has fallen 20% or more.
Using Morningstar data, we have had nine bull markets since 1926. Of those, four of them have been both longer and have had considerably larger total percentage growth in the S&P 500 Index then the current bull market. Using the definition above the chart below shows the bull and bear markets (in chronological order) since 1926 to the end of 2017.[1]
While the current bull market (by the S&P 500 Index Morningstar definition) is just about equal to the average bull market in length, it is considerably below the average in terms of total return. This might argue that the bull market could continue for a few more years. In terms of annualized return the current bull market is higher than four past bull markets but less than four as well.
If bull and bear markets were always of equal length, we could say sell equities in March of this year, as that is when the current bull market will equal the average length of a bull market. But bull markets since 1926 have been as long as 15.1 years and as short as 2.5 years. If the current bull runs as long as the longest in recent history, it would last till May of 2023!
It is a fact that timing the markets is difficult if not impossible. Bull and bear markets follow each other, but not in any predictable way.
Market watchers and economists say there are three types of bear markets.
Cyclical bear markets, which are functions of the business cycle caused by impending recessions, rapidly rising interest rates, rising unemployment and decline in corporate profits. While the Fed is raising interest rates it seems they will do so moderately; unemployment is now low and corporate profits look good with the recent drop in tax rates. So, a cyclical bear market seems unlikely in the near future.
Structural bear markets are caused by financial bubbles, most recently the dot com bust of 2000 and the real estate bubble of 2008. While stock prices are high at present, there does not seem to be a bubble there or anywhere else in our economy.
The third type of bear market is event-driven. These are triggered by an unexpected event — such as the 1973 oil crisis, the Russian debt default in 1998 and the 2011 European debt crisis.
These of course are quite unpredictable. Possibilities include problems with North Korea or Iran, or a political event that disrupts the confidence of investors. This type of bear market is always a possibility, and the ones mentioned are only those we now see. Unseen and unpredictable events are always a possibility.
One happy conclusion from the data is that losses during a bear market usually turn out to be short-lived and are recouped when the market rebounds as it always has to date.
History shows us that the long-term trend of the stock market is upward. Profits foregone by remaining on the sidelines are permanent and can never be made up.
While the bear is out there, we cannot predict when or why the bear market will start.
—————
Kevin B. Murray is a vice president at Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, non-profits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534, (585) 586-4680.
