When it comes to investing, bull market magnitude isn’t the most important factor. It is just an arbitrary signpost based on past performance. Bull markets have never lasted the same amount of time, and bull market magnitude is no different. The first three bull markets had an average duration of 63.7 months and 249% returns. The next bull lasted 50 months and 86% returns, and the current bull market is longer than 1957’s bull. That’s not to say that bull market magnitude doesn’t matter. Rather, it’s a false prediction.
Duration
The most notable examples of long bull markets are the Dot-com bubble in the 1990s and the Great Crash of 1929. The third longest bull market is associated with the US housing bubble, which culminated in the bust of 2007 and the Global Financial Crisis. Railroad stocks were associated with speculative mania. In addition to the market’s length, other periods of long bull markets include the late 1990s and the present day.
The S&P 500, the primary stock market index in the United States, fell 57% from its top position in October 2007 during the transnational financial crisis. Since then, however, it has gained 415%, including dividends. This remarkable growth in the stock market has occurred against a backdrop of a bleak economic backdrop. Even the threat of trade wars, a surging US dollar, and the withdrawal of stimulus from central banks have failed while derailing the bull since March 2009.
Magnitude
Bull markets are periods in which stock prices increase. These periods occur when prices are 20% or higher above the 52-week low, the lowest point in a calendar year. Typically, this bull market is characterized by a long streak of gains. In other words, stocks have been soaring higher than their 52-week low, and this is good news for investors. In fact, the bull market in the U.S. has lasted since 1871.
The onset of a bull market is often preceded by economic expansion. The stock market often reflects public sentiment toward future economic conditions. This means that the stock market rises prior to broader economic measures, like the GDP. On the other hand, bear markets generally begin several months before a country experiences an economic contraction. That’s why, in a typical U.S. recession, the stock market will be falling for several months before the economy has reached its official contraction.
Velocity
The duration and magnitude of each market cycle vary considerably. Bull markets get to last longer in comparison to bear markets, and the average duration of the latter is just 1.5 years. Inflation, dividend yield, earnings growth, and valuation changes all affect the bull market. Considering the current economic environment in terms of previous bull markets can help investors make sound investment decisions.
The duration and magnitude of each large directional swing are different, as are the sources of return and investor experiences. By historical standards, the current bull market has been relatively slow, largely due to the return of investors following the financial crisis. The continued decline of interest rates has benefited balance investors while resulting in muted upcapture. By taking into account different geographies, investors can develop a plan to take advantage of this market.
Impact on investors’ expectations
When it comes to investing, a major mistake people often make is relying on the bull market magnitude as a predictor of future returns. The truth is that markets have a tendency to bounce back if something negative happens. For example, the Nazi invasion of the Sudetenland in 1938 cut short the bull market’s rebound from the low on 3/31/38. As a result, many investors view this arbitrary indicator with caution.
Historically, investors have used the “this time is different” rationale to justify their emotional investment decisions. While many will argue that the stock price will rise in the coming year, a bear market can’t last forever. For example, in October, the Dow Jones Industrial Average dropped by 22.6% in a single day. Many investors use this rationale to justify emotional investments, but there are risks associated with this strategy.