Bulls Versus Bears
Tuesday, September 20, 2016
Even though college football and NFL seasons have started, I am not suggesting a game between the Chicago Bulls and Chicago Bears. I have just started to notice that many of the talking heads we see on television are suggesting that the current bull market in stocks we have enjoyed since March 2009 may be coming to an end.
First, let's do just a little review, take a look at some historical trends, and view things in the current context.
A bull market is a financial market of a group of securities in which prices are rising or are expected to rise.1 Bull markets happen when the market is going up aggressively over a period of time. They are characterized by optimism, investor confidence, and expectations that strong results should continue.
The opposite of a bull market is a bear market which is characterized by falling prices and typically shrouded in pessimism. The use of bull and bear to describe markets comes from how the animals attack. A bull will thrust its horns up into the air while a bear swipes its paws downward. Recently the three major equity indexes (S&P 500, Dow Jones Industrials, and NASDAQ) have reached or are near their all-time highs.2
According to Ned Davis Research, on a historical basis going back to 1960 using the Dow Jones Industrial Average to represent the market we have experienced 18 bear markets and 17 bull markets.3 The average frequency of a bear market is once every 3.2 years and the average frequency of a bull market is once every 3.3 years. The average duration of a bear market is 11 months and the average duration of a bull market is 28 months. The average bear market decline is 26.3 percent and the average bull market increase is 76.1 percent.4 Remember the past is no guarantee of the future and making bets based on historical averages can be hazardous to your wealth.
Again, on a historical basis bull markets and bear markets often closely follow the traditional economic cycle. Remember in business school, an economic cycle consists of four phases: expansion, peak, contraction, and trough.
If you listen to the two presidential candidates, you would have a hard time deciding on what part of the economic cycle our country is in. One candidate says economic growth is all fake and that doom and gloom are on the horizon unless he gets elected. The other candidate says the economy is fantastic and that we just need to continue the policies of President Obama and prosperity will come to all.
The reality is that the truth probably lies in between the two themes.
Our economy has been in slow growth mode over the last several years with GDP averaging around 2 percent annually. Due to its spending and debt addiction, our government's tendency to take more money away from the private sector and taxpaying citizens will only continue to hamper the growth of our economy.
I don't know if we are at the start of a bear market or if the current bull market will continue. I do know that if you have been invested in equities over the last six years and have experienced gains in your investment portfolio, rebalancing your portfolio generally seems to work out better in the long run if you do so when the market is at all-time highs versus making changes when the markets have fallen in excess of 20 percent.
2 Indexes are unmanaged and one cannot invest directly in an index.
3 Ned Davis Research
4 Ned Davis Research