There are many theories about how the terms bull market and bear market came to be, but the most popular explanation is how each animal attacks. A bull attacks by lowering its head and using its horns to lift “up” its opponents, while a bear attacks by raising its front legs and using its paws to swipe “down” at its opponents. Thus, when the market is trending “up,” it’s termed a bull market and when the market is trending “down,” it’s termed a bear market; a bear market is confirmed when a market declines by 20% or more.
Between 1932 and 2021, the S&P 500 Index experienced sixteen bull markets and sixteen bear markets (table below). The longest bull market in history, March 2009 to February 2020, lasted 10.9 years and returned +401%. This was followed by the shortest bear market in history, February 2020 to March 2020, which lasted 23 trading days and returned -34%. Although bull markets and bear markets come in all shapes and sizes, the average bull market (ex-current bull market) lasts 4.3 years and returns +158%, while the average bear market lasts 1.7 years and returns -38%.
The current bull market, which has lasted 1.3 years and has returned +92%, should continue to trend up until earnings growth peaks, fiscal and monetary stimulus is contractionary, and inflation becomes a problem. For the remainder of 2021 and throughout 2022, earnings growth is expected to be positive, fiscal and monetary policy is expected to be expansionary, and inflation is expected to overshoot but stabilize. We believe that the global economy will continue to recover, life will return to normal, and the current bull market will extend into 2022. Historically, bull markets have been associated with the first three stages (early cycle, mid-cycle, and late-cycle) of an economic cycle (chart below), while bear markets have been associated with the last stage (recession) of an economic cycle. With that said, we are currently early cycle and will likely enter mid-cycle within the next twenty-four months; dependent on the speed at which the global economy recovers. In mid-cycle, growth typically outperforms other investment styles, mid-caps typically outperform other market caps, and information technology and communication services typically outperform other sectors.
We anticipate periods of volatility as we navigate the current economic cycle; however, we expect positive returns over the long-term or until late cycle and prior to a recession. The duration of the current bull market or economic cycle is uncertain, but we do have visibility out to 2022 and would recommend that investors buy the dips. Elevated market valuations could be a reason for the next dip.We analyze the markets closely and make investment decisions that first, protect our client’s capital and second, grow our client’s capital, throughout the different stages of an economic cycle.Is your portfolio positioned for this stage of the economic cycle? If you are not sure, please feel free to contact one of our portfolio managers.Baron Lee, CFAVice President & Portfolio Manager