The Long View: On Being Bearish or Bullish
The stock market has a rich history of fluctuating between periods of bullish and bearish sentiment, shaping the overall trajectory of long-term returns. Understanding the dynamics of these market cycles is essential for investors seeking to capitalize on opportunities and navigate the ever-changing landscape. In this article, we will explore the significance of historic bull and bear markets and how their interplay has contributed to the overall growth of the market over time.
What is a Bull Market and a Bear Market?
A bear market is marked by a prolonged period of declining stock prices, often accompanied by investor pessimism, heightened selling activity, and negative economic sentiment. Bear markets are characterized by weak corporate earnings, economic downturns, and increased risk aversion among investors. While there is not a formal definition, one common rule of thumb is that a bear market is when the stock market (S&P 500 for example) closes 20% lower than the previous high. The length of the bear market is measured then from the high point to the lowest point in the cycle.
A bull market is characterized by a sustained upward trend in stock prices, typically accompanied by investor optimism, increased buying activity, and a positive economic outlook. Bull markets are marked by strong corporate earnings, favorable economic conditions, and a general sense of confidence among investors. A bull market is commonly measured at the end point of a bear market to the high point when a bear market begins again.
Bulls and Bears in Charts - Chart 1 of 3
Bull markets and bear markets are defined by multiple periods of ups and downs. The below chart sorts the 97-year period from 1926 to 2022 into positive years and negative years then buckets them by the size of gains or losses.
It’s easy to see from this chart that there is a lot of variability in the markets but that the markets more frequently have positive years. In fact, the most common frequency of return is +28%! Of course, you have to balance the positive years with the negative years. Looking at the years of losses, you can see the 1930’s was a rough decade with 3 of the 6 greater than 21% losses.
Over the long run, the average S&P 500 return was 10.1%.
A casual observation of the chart below might say, how has the market been positive 71 years with an average of 21.3% returns, down only 26 years with an average of -13.4%, and only returned 10.1%? Doesn’t that seem low? To understand this, check out my article on Portfolio Losses: The Mathematics of Recovery
Bulls and Bears in Charts - Chart 2 of 3
The next chart illustrates the gives and takes of market bull periods and market bear periods. The chart below is from 1942, not 1926, and shows the length of each market, the total return for the market, and the average return for the market.
From this you can easily see that Bear markets are much shorter than bull markets. Bear markets have averaged 11.1 months whereas bull markets average 4.2 years.
In recent history, we have enjoyed some of the longest bull markets with the bull market in the late 1980’s lasting 12.3 years and the bull market starting in 2009 lasting 11 years.
Bulls and Bears in Charts - Chart 3 of 3
Finally, one of my favorite types of charts to look at when the market headlines are scary even for the most seasoned investors. The below chart shows the market returns since 1970 along with various news headlines along the journey. The average annual return for the S&P 500 since 1970 was 10.62% which is not far from its longer-term average since 1926 (see above).
Throughout history, financial markets have endured numerous challenging events, including wars, political turmoil, and global financial crises. However, amidst these trials, the markets have displayed remarkable resilience, driven by ongoing innovation and the pursuit of new services. It is within this context of historical resilience that we choose to invest for the long term, recognizing the potential for growth and opportunity despite periods of volatility..
