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Stock Market Cycles – Bulls, Bears, Corrections, Oh My!

by Chris Perras, CFA, Chief Investment Officer.

The financial press is constantly using terms such as “bull market”, “bear market”, “market correction”, and “recession”.  What do these terms mean, what characteristics do they hold for the asset prices, and most importantly, what do they mean for your portfolio?

Overview: Bull versus Bear Markets

The term “bull market”, while generally applied to the stock market, can be applied to anything that is publicly traded, ranging from bonds, commodities, real estate, and currencies.  “Bull markets” are periods when market prices rise over extended times, most often multiple years. Alternatively, “bear markets” are characterized by falling prices and investor pessimism.

Bull Market Characteristics

Bull markets tend to happen when they economy is accelerating off a low level or growing moderately with stable inflation.  The term “goldilocks” is often associated with bull market cycles.  The economy is growing but “not too hot and not to cold”.  Normally, they coincide with a trough and turn in corporate profits, rising investor optimism, and rising demand for owning stocks.  Economic activity is growing but restrained and management teams are focused on marginal return on invested capital.  The secular bull market that started at the end of 1982 with the end of “stagflation” and ended during the “internet bubble” in 2000 lasted almost 20 years.  The Dow Jones Average returned over 16.5% per year during this time period.  The tech laden NASDAQ increased 500% from 1995 to 2000 during the last years of this bull market.

Bear Markets

Bear markets are periods of time when either fundamental factors, investor sentiment, or unforeseen events (war, terrorism, quantitative trading-think 1987 crash) drive down prices over 20% from their previous peak.  Why 20%?  It’s an arbitrary number chosen by investors!  Secular bear markets, and those caused by economic recessions happen but are rare.  Since the end of World War II, the US stock market has had 11 bear markets, lasting on average just slightly longer than 5 quarters. They have averaged close to -35% peak to trough losses.

Market Corrections

Market “correction” is a loose investor term for market prices declining 10% from their recent peak levels.  Why 10%?  It’s an arbitrary number.  The conventional method for measuring corrections looks strictly at closing pricing and is measured from a market peak to the subsequent market trough.  Analysis by Goldman Sachs Group indicates that the typical correction within a bull market takes 70 days to reach its trough, followed by a recovery period averaging 88 days.  The passed 10 years has coined the term “buy the dip or BTD” for putting money to work during these sharp market pullbacks.

Economic Recession

An economic recession is defined as two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).  Recessions, while unpleasant, are a normal part of the economic and business cycles.  As mentioned earlier, they tend to last roughly 5 quarters of economic activity.  There are no proven, reliable ways at predicting when and how long and severe a recession will be.  Some early warning indicators that investors look to are declining home prices, slowing employment gains, accelerating layoffs, and inverting bond market yield curves.  Additional factors that OHFG considers are earnings estimate revisions, credit spreads in the bond market, and energy prices. Stock market price declines have averaged close to -35% during the recessionary economic periods.

 

 

Views and opinions are subject to change without notice. Data cited is believed to be reliable but is not guaranteed. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investing involves risk and past performance does not guarantee future return.