Bull markets don’t die of old age, as investors have been reminded of many lately, but how long do they live on average?
Investors consulting the S&P 500 historic chart will find a technical answer to this question. The market history ranges from four to eleven years, and big first year gains were followed by longer periods of bull markets. This could be seen as good news for investors who tend to take a technical look at the dynamics of stocks: the bull run in the US large-cap stock index, which began after the sudden collapse of Covid in March 2020, posted the biggest gain in the first year for the S&P 500 since 1945, according to CFRA Research.
Stock futures fell into trading to start the week following the Dow Jones Industrial Average and S&P 500 new record on Friday. Investors have been concerned and will continue to fear a retreat. This is evident from the Wall Street Research Notes and the institutional investor comment – whether “the big decline” is coming in May or June, watch this VIX and add the hedges. When it comes to fears of a wider correction, the truth is that the corrections (plural) have already taken place.
A trader takes a break on Wall Street outside the New York Stock Exchange.
Brendan McDermid | Reuters
Some areas of the market saw a decline of 10% or more at some point in 2021. In February and March, the big tech and growth names that had led the market for so long corrected 15%. Then, after bouncing back sharply from their low in Covid in 2021, energy stocks fell 13% in just two weeks. The Russell 2000 small-cap rally, fierce after the November 2020 elections, also fell by a 10% matter of two weeks.
“Almost exactly, the entire stock market saw a correction of 10%, but at different points in time,” said Fundstrat Global Advisors on the one-year anniversary of the low point of Covid at the end of March. Fundstrat believes that these “rolling corrections” have reduced the likelihood of a wider index correction. That hasn’t stopped investors, however, from worrying about the success of the stock portfolios still to come, whether the culprit is the inflation bogeyman, an even worse signal of hedge fund failure, or just a market that isolates the isolated, but uncovering disturbing headlines pointing to a “bubble” from crypto or a New Jersey delicatessen that hit a market cap of $ 100 million without almost anyone realizing it.
Read the graph of a bull market at record speed
The market rose sharply in record time. Since the March 23, 2020 low, the S&P 500 has risen more than 90%. the Dow Jones Industrial Average just under 88%; and the Nasdaq close to 112%. This is the highest bull market gain in the first year since 1945, beating the 37.5% average for all previous bull markets.
The pace of this bull market makes sense given how quickly the 2020 bear market moved: 33 days from top to bottom, according to CFRA. “Fastest in history,” said Sam Stovall, CFRA’s chief investment strategist. And then the market recovered everything it had lost in less than five months. This was the third shortest period in market history to make up for such massive losses. The history of the last 12 bull markets shows that those who recovered the fastest from bear markets lasted the longest, on average. Only four of the last 12 bull markets didn’t make it to 1,000 days. The remaining bulls lasted from four years (October 1957) to nearly eleven years (March 2009).
A simple explanation: bull markets that are returning faster are an indication that investors have had less uncertainty and more confidence that the economy and earnings will recover.
“The shyness with which investors are willing to get back in implies how long the bull market can last,” said Stovall. In this case, it’s the lack of shyness, and what happened earlier this year is a symbol of the bull markets. You can call it “rolling corrections” or, like Stovall, “rotations below the surface instead of a general retreat”.
April gains have been strong so far and Wall Street is climbing on the wall of worry. Stovall believes that the tailwind can get even better and bring more momentum. “Investors generally believe that current estimates underestimate what is likely to happen in 2021 and that we should see economic growth spike in the second half of the year.”
Reservations on the history of the stock recovery in Covid
One caveat to this bull market and, as a result, any reading of the S&P 500 historical chart as a reason to stay bullish is its origin. As former Fed chair Ben Bernanke said last spring, Covid was more of a worse “blizzard” than any market and economic downturn that had occurred before, including the Great Depression. However, to technical market analysts, it doesn’t matter what causes prices and valuations to reset when the end of a bull market and the beginning of a new one are identified.
Yes, it was different this time. The break of the former bull market was a “conscious choice”, that is, the shutdown of the economy. But all bull and bear markets are “artificial” in one way or another, and for Stovall the charts say a “bear market” is a bear market, a bear market. The 2020 bear market was more of a cyclical bear market than a secular bear market or even a “mega meltdown”. His preferred way of describing it? Also no snowstorm, just “garden diversity” bear.
Bull markets can take years to die, but over a 10 year period dating back a century, average annual growth of about 6% from the S&P 500 is the norm.
For investors, worldly forces come, namely the intersection of interest rates. That concerns Stovall. “I think investors have been grappling with the secular change in the bond bull market and the declining yield environment since 1980. We’ve been in a secular interest rate bull market for 40 years and now we’re making that turnaround.”
It’s the K- or V-shape that the bond market is taking that is more worrying today than the entire debate last year about a K- or V-shaped recovery in the US economy. That doesn’t mean there will be a V-shaped rebound in rates, “but certainly the best in terms of low yields is behind us,” said Stovall.
For investors looking to draw more pessimistic parallels to the past bull market, Stovall points to two of the most recent bull markets that didn’t make it to 1,000 days: 1966 and 1970. The 1966 market marked the end of the “computing bubble” “- yes , The 1960s had the first tech bubble. And in 1970, inflation finally began to take hold of the economy and investor sentiment. “My concern would be over-stimulating the US economy, leading to a greater than expected rise in inflation expectations and expectations Interest rates would result, “said Stovall.
This is exactly what investors were worried about and were in early 2021 before the market overcame those fears. There are technical reasons to be concerned in the short term. The S&P 500 is already up double-digit percentages this year, more stocks than ever trading above their 200-day moving average, and it’s expensive compared to its own history, and stocks from overseas (whose index is relatively expensive was) for years) and small caps based on earnings growth forecasts.
Stovall believes that it is okay to believe the best of this bull market is behind us and prepare for periods of “stock market digestion”, but that does not mean the good times are coming to an end, especially when the recent ones turn GDP projections for this year are changing to be precise. “That doesn’t mean we’re heading for a crash like the 1929, but investors should expect more normal returns going forward,” he said.
On average, the history of the S&P 500 shows that the return of a bull market is 38% in year one and less than 12% in year two. More important from Stovall’s point of view is the average annual growth rate of 6% that the S&P 500 has achieved for 100 years on a rolling 10-year basis.
“The implication is that things will go down. Easing profits rather than erasing returns,” he says.
One hundred years of market history suggests this is at least a safe, if somewhat sobering, bet.