TAKING STOCK OF THE DECADE-LONG BULL MARKET
If the S&P 500 hitting new all-time highs over the past months didn’t make you nervous, many in the financial media are turning to another bogeyman for this purpose: the length of our current bull market. Now over a decade old (debatably – more on this later), the current bull market is the longest on record, which may prompt worries of how much longer it can continue. While it is prudent to monitor market conditions, we do not believe bull market length alone is cause for concern.
First, let’s clear up some technicalities.
A bear market is typically defined as a drawdown of 20% from a recent (usually one year) market high. While this is a widely accepted definition, it is also completely arbitrary. The S&P 500 has sustained multiple 19%+ drawdowns over the last decade (first in 2011, then in late 2018), but neither technically registered a bear market. Further, many consider the 2016 downturn a bear market, as well (during this time, the median S&P 500 stock was down 25%, small caps were down 27%, and oil was down 75%). So, while this is the longest bull market by an arbitrary definition, the reality is that the stock market has hit the “reset” button several times over this span.
Length is also not a good metric for determining strength.
While the economic expansion is the longest on record, it is also one of the weakest. Cumulative GDP and job growth are the worst of any expansion since WWII (despite the length). Further, outside of some minor extremes (bitcoin and marijuana stocks, to name two), there has been a significant lack of investor enthusiasm throughout this run, earning it the mantra “the most hated bull market in history.” This has likely capped any significant excesses from building up and causing problems. Unlike the tech and housing bubbles, there hasn’t been notable investor zeal for any asset or sector. In fact, pessimism and doubt have largely reigned supreme.
Even ignoring the facts above, a longer bull market doesn’t necessarily precipitate a longer (or more severe) downturn to follow. According to MarketWatch, the length of a bull market has historically been negatively correlated to the length of the subsequent bear market (meaning that in the past, longer-than-average bull markets were followed by shorter-than-average bear markets). So even if you follow the bear market definition to a tee, length alone should not be a reason to fear the next downturn more than any other.
Ultimately, all things come to an end. A bear market will occur at some point in the future. While these drawdowns are impossible to predict with any certainty, they are the price we pay for the long-term gains in stocks. Still, as we do not believe that market timing is a viable strategy, all we can say with certainty is that the length of this bull market alone should not give investors pause.
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