Anatomy of a Bull Market

Bull Markets Come In All Shapes and Sizes

• ​Long-term average stock returns smooth over the bull and bear markets that investors experience, and no two market cycles ever unfold the exact same way. Bull and bear markets can vary significantly in both duration and magnitude.
• But there are other characteristics of bull markets that can also differ in meaningful ways, such as velocity, sources of return, and investor experience.
• When it comes to analyzing bull markets, inflation, interest rates, equity valuations, earnings, and dividends all play a part.
• Assessing the current economic environment in the context of historical U.S. and international bull markets can help set better expectations and reduce the risk of surprises that can lead to emotional decisions.
• Over the period from 1903 to 2016, there were 12 bull markets in the S&P 500.  The average bull market lasted 8.1 years with a total return of 387%.  The average bear market lasted 1.5 years with a total loss of 35%.
• The current bull market, which began in March 2009, is the 7th longest and the 6th strongest.  For it to be the longest ever, it would have to continue through the fourth quarter of 2023.  For it to be the largest ever, the S&P would have to return another 665%.

While this analysis is informative, it’s still an incomplete picture of the anatomy of bull (and bear) markets.  Below, we will examine this same data from four other perspectives:

1. Velocity: How fast do bull and bear markets unfold?
2. Sources of return: How much of bull market returns are composed of inflation? Dividend yield?  Earnings growth?  Valuation changes?
3. Experience: What was the experience of an investor using a balanced 50/50 asset allocation during these bull and bear markets?
4. Context: How does the experience of bull and bear markets in the U.S. compare to other markets around the world?

Click here for the entire article from Newfound Research via Morningstar Magazine (PDF version).

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This article originally appeared on Flirting With Models, a blog by the firm Newfound Research, a quantitative asset manager. This article also appeared in the April/May 2017 issue of Morningstar Magazine.