There Is More to Market Cycle Measurement Than Meets the Eye

Is this the “best bull market ever?” One chart making the rounds of late argues so, noting it is both the longest and highest returning, according to its publisher’s calculations. Another chart, though, argues this bull’s returns are below average—suggesting it has been a long, slow plod. In our view, the debate highlights the fact analyzing market cycles is more art than hard science. It also highlights an oft-overlooked feature of cycle shifts: fundamental drivers. Let us explain. 

A lot of the technical terms you may see in financial news stories are somewhat subjective—open to interpretation. Different definitions and measurement methodologies abound. For example, many treat stock market declines of -20%—a common bear market threshold—as a clear-cut bear. Some do so even if markets never close below that mark. Others go beyond market cycles—a bull and bear (or vice versa) in succession—and focus on so-called “secular” market trends. These potentially multi-decade periods of overall rising or falling stock prices gloss over market cycles and look at super long-term trends—a flaw for investors sizing up current market conditions, in our view.

There are also various ways to measure and compare market movement and, hence, bull markets. By length, US stocks’ current bull looks like the champ.^[i] Since its trough on March 9, 2009, the S&P 500 Total Return Index has soldiered through six corrections—short, sharp, sentiment-driven drops of -10% or greater—without sustaining a prolonged, fundamentally driven decline exceeding -20% (a bear market). That puts its age at 10 years, 8 months and change.

But things get trickier from there. As of yesterday, the S&P 500’s cumulative total return in this bull is 475%.^[ii] That beats what some claim was the prior leader—the 1949 – 1956 bull, which they calculate clocking in at 454%.^[iii] But using cumulative returns doesn’t account for their different timespans. To do so, you might want to annualize returns—break cumulative returns up as if they were achieved in sequential yearly chunks. The roughly seven-year 1949 – 1956 bull’s annualized total return was 26.6%, which outpaces this bull’s 17.8% to date.^[iv] Actually, this bull is below the typical bull market’s average. So is it strong or slow?

Moreover, pundits arguing the current bull has the highest (cumulative) return highlight a second problem: start and end date determination. Their analysis cuts off the 1990s bull on 7/17/1998. This, despite the fact the S&P 500 fell only -19.2% between then and a low on 8/31/1998.^[v] It then turned higher. By the time it peaked, it sported cumulative returns of 546%—history’s highest by a fair margin.^[vi] Also, if we are calling 7/17/1998 a cyclical peak, would this bull have peaked on April 29, 2011 when the S&P 500 began an -18.6% correction?^[vii] Or on September 20 of last year, when US stocks began a -19.4% slide?^[viii]

In each of these three cases—1998, 2011 and 2018—stocks rebounded swiftly without a fundamental change. The lack of a fundamental driver is a key differentiator between corrections and bears, in our view. Corrections are sentiment driven—not stoked by shifts in the economic cycle or major political/regulatory developments. Bears, on the other hand, have fundamental causes. Either a massive negative that comes out of nowhere to wipe several trillion dollars off global GDP, or rapidly deteriorating economic conditions euphoric investors initially overlook. In both cases, a bear market forms as investors gradually see a worse fundamental picture than they thought. Hence, we think determining whether or not a market move has a fundamental cause is crucial to identifying market cycle turning points.

 So while measurements can and do vary, investors should focus at a higher level. Assess whether investors are overlooking a major fundamental negative with the potential to usher in a bear. Since we don’t see something like this out there today, we think this bull market is set to persist.