March 2009 marked the beginning of a bull market, but the fate and direction of the stock market were uncertain. Investors had just experienced a bear market that sent their portfolio values spiraling downward. With the bull still running strong 10+ years later, investors might be wondering whether another end is near.
Legendary investor Sir John Templeton’s famous maxim, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria,” can help you conceptualize market cycles. The following graphic illustrates the typical evolution of sentiment during a bull market cycle:
Intended to illustrate a point. Does not reflect actual returns or market behavior.
When a new bull market starts—typically the bear market’s lowest depth—most investors have no desire to own stocks. But this is when the returns are swift and massive, and could erase some or all of the sharpest downswings you might have seen toward the end of the bear market. Then, as the markets and economy improve, the worries gradually fade, and those investors who hesitated now start showing some enthusiasm about the markets. As the bull matures, investor sentiment shifts to sky-high expectations for market returns.
Keeping tabs on sentiment relative to the prevailing economic fundamentals is a good way to assess a bull market’s maturity. Sentiment surveys don’t provide a complete picture.
Investors are often pessimistic at or near the bottom of a bear market. After the market has gone through a downward trend for a few years, investors show their loss of confidence by selling assets.
Stocks climb as skeptical investors anticipate another recession or bear market. They tend to distrust the prevailing bull market. Fears are normal. All bull markets thrive on them. But fears diminish as a bull market matures. Investors who were skeptical finally get back into the markets. As economic conditions improve, stocks start climbing the “wall of worry.” Investors who resisted selling in the previous bear may start to see their portfolio values rise.
Skepticism turning into optimism fuels the next leg of the bull market. At this stage, most investors have shaken off the worst of their fears from the previous bear market. It is common knowledge that a bull market is underway. Investors raise their expectations for company earnings, anticipate higher valuations, and invest more money in stocks. Investors start to develop a fear of missing out on the strong bull market returns.
The last stage of buying takes place during the euphoric phase. Everyone now wants to buy into the market because they are sure stock prices will continue to rally into the future.
At the end of the bull market’s lifecycle, euphoria is usually at its peak, lulling investors into false security.
Bull markets tend to end in one of two ways:
Equities stop climbing the “wall of worry” when sentiment becomes euphoric. Walls and wallops can only be identified in hindsight. Identifying the start of a bearish trend is extremely difficult especially in the midst of a bull market.
Investments are bound to carry risks and one big risk is realizing insufficient growth to achieve your longer-term goals. Staying invested in the stock market even during downturns can be worth the disappointment. Our wealth advisers can help you define your investing goals and set up a financial plan to help meet your longer-term goals and objectives. Contact us today to learn more.