With the stock market in full swing, investors are questioning whether the end is nigh. This month, we review bull and bear market cycles past, and observe the difference between cyclical and secular periods. With the benefit of hindsight, we conclude that assigning market labels can be challenging, devilishly tricky, and, at times, even imprecise
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Not a day goes by without hearing what appears to be the predominant question for investors, namely, When will stocks come back down to earth? Variants of that query include, Isn’t this bull market getting long in the tooth? And, Stocks go up and up, so we must be on the verge of a sell-off, right?
These questions are not about a pullback per se. No matter the market, corrections of 5%-10% are always possible and even to be expected. Rather, most of these concerns stem from a common reading of the past investing years. To wit, that we are in a robust bull market in US equities that began at the tail end of the financial crisis.
Remove that assumption, and a multitude of other possible interpretations emerge. As Barry Ritholtz, one of the more astute market observers who worships few, if any, sacred cows, recently and acerbically observed, most of what people think they know about when to call market cycles is wrong, and now especially.
In that spirit, we suggest that the nomenclature of “bull” and “bear” markets is flawed at best, and damaging, at worst. It assumes clear demarcations that most experienced players in the market ought to recognize as both simplistic and misleading. Although understanding where one is in long market cycles is certainly important, few seem to have a good feel for when to mark what. Going forward, therefore, it might be best to abandon these terms altogether.
What market are we in?
On March 9, US stock markets “celebrated” the eight-year anniversary of the low hit in 2009 marking the heart of the financial crisis. That led, predictably, to a slew of headlines with birthday wishes. Most of those, however, had as much cheer as sending well wishes to a terminally ill cancer patient. Fortune was typical: “It’s the Bull Market’s 8th Birthday. Wall Street Analysts Aren’t Celebrating.” The article continued to report widespread sentiment that the bull has or is about to peak, with predictable references to concerns about valuations, future earnings, rising interest rates, possible inflation, plateauing margins, and uncertain sources of future revenue growth.
But using March 9 as the start of a bull market is questionable at best. As Ritholz points out, taking the low point as the start of a new bull market would lead to a different time frame for what have become established markers for earlier bull markets, such as 1946-1962 and 1982-2000. If the low point had been used in those cases, our date marking the beginning of those bull runs would be many years earlier. Instead, we use the date on which the market recouped its losses and marked new highs as a starting point, which, in the present case, puts the bull market beginning in 2013, rather than 2009.
There is also the distinction between “cyclical” markets and “secular” ones. The latter are shorter lived and can occur in the midst of an opposite secular cycle, meaning that there can be bullmarket spurts in the midst of longer-trend bear markets, or bear-market periods in the midst of secular bull markets. In multiple periods in the 1970s, markets surged 50% and more only to collapse. On the flip side, there were sharp “bear” periods in the late 1980s and throughout the 1990s; the infamous Black Monday of October 19, 1987 is probably the most remembered. In many periods in the 1990s, stocks pulled back in excess of 20% (the accepted definition of a bear market).