Is the current bull market really so different?
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By John Krisko  | Tuesday, August 29, 2017


 

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The S&P 500 Composite Index dropped 2% from its all-time high during the week of Aug. 7, primarily on concerns surrounding North Korea. It briefly recovered before declining again to finish the following week down 2.5% from its high. Geopolitical rhetoric aside, a pullback of this size represents normal and healthy consolidation for the market. Nevertheless, the assertion, which is seemingly prevalent during every pause in upward momentum, is made that this marks a turning point for U.S. equities, as the positive trend that began in 2009 comes to an end. But is it really?

An argument now making the rounds asserts that the current 8½-year S&P 500 bull market is the second longest in history, and that because nearly every other bull market has reversed course by this point, this market is also likely to follow that slippery slope. After all, if no other market has maintained a positive trend for this long, then the likelihood that “this time is different” is low. Although not particularly compelling reasoning at first glance, the idea certainly warrants a deeper look. Such an investigation should start with a review of the behaviour of past bull markets.

First of all, the origin of the “second-longest bull market” claim is elusive. It may be simply a meme that has taken on the patina of fact without actually being one. In other words, it could really be “fake news.” However, an interesting recent analysis titled “History of U.S. Bear & Bull Markets Since 1926” by First Trust Portfolios LP, current to June 30, 2017, presents convincing evidence to refute the contention that the current bull market is the second longest in history.

According to the research by First Trust, the average bull market lasts nine years with a cumulative total return (TR) of 470%.* That leads to the surprising determination that far from becoming one of the greatest bull markets, the current run in the S&P 500 is not even greater the historical average! In fact, it will not surpass the average historical length until March 2018, and at the current annualized rate of 17.9% (293.5% cumulative over 8.3 years) will earn below average returns. In order to outlast the longest bull market, following WWII, the S&P 500 would need to continue upwards through Q1 2024, more than six and a half years from now.

Clearly there is a difference in methodology between the two papers (First Trust considers the total return of markets since 1926 and defines a bull market period as the point “from the lowest close reached after the market has fallen 20% or more, to the next market high”). However, knowing that both analyses use a 20% decline as a benchmark, it is unclear how they could produce results with a difference of this magnitude. Still, in light of the robust and well-document information presented by First Trust and lacking specific data to the contrary, it must be considered accurate.

The 2009 bull market may not have the record as the first or second longest, but it is not without distinction. It currently holds the record as the most average bull market in history. That is, there is no other market since 1926 that has been as close to the average length as the current one. At first, it might seem like a disappointing development. The good thing about being average, however, is that any arguments built on the premise of the market being overextended historically are moot – it is just a run-of-the-mill bull market. Furthermore, it is in a unique position, whereby a look at the behaviour of the markets comprising the average may offer more relevant insight than it otherwise would.

Deriving the time-weighted average annualized total return (ATR WA) of bull markets less and greater than the nine-year average lifespan, current market excluded, effectively provides a comparison of long and short bull markets. From there, it is simple to calculate the same average for the bear markets that follow each type. The resulting market averages have the characteristics shown in the following table.

The disparity between the short and long averages is striking. Although the short bull lasts only a third of the length of the long bull, it has a significantly higher annualized return. It is tempting to conclude that a series of short bull markets, which achieve greater returns for a short amount of time, are preferable to a series of long bulls over the same number of years. This would certainly prove ruinous, and the reason why is clear when factoring in the bear markets that follow them.

Like the difference between the long and short bull markets, the losses in a short bear market are much greater than those of a long bear. The average duration, of a long bull, however, is also much longer exceeding the duration of a long bear market by 40%. This has the effect of completely removing any benefits of the higher returns observed in a short bull market.

Put another way, short market cycles “burn” hot and quickly, ending in a bear market like an explosion and destroying nearly all of the earnings from the preceding bull market period. Long bull markets, on the other hand, last for much longer and proceed at a slower pace. They also tend to not end in a “blaze of glory,” which serves to preserve much of their hard-won gains to compound further in the next cycle.

Luckily for U.S. equity investors, the current bull market will transition from the short side of the average to the long when it turns nine in March 2018, increasing the odds that when the next bear market comes, it will be relatively gentle. Until then, one can always hope that past performance is indeed no guarantee of future results.

* History of U.S. Bear & Bull Markets Since 1926.” First Trust Portfolios LP

John Krisko, CFA, BBA, is Manager, Analytics & Data, at Fundata Canada Inc., a leading source for investment fund information.

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© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

   
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