The S&P 500® Index entered a bull market just last Thursday. It seems that neither the gloomy economic sentiment nor the Fed’s rate hike campaign can slow the bull’s rage, as the market is currently more than 20% above the lows of last October. Once again, some people are starting to call this the most hated Bull Market rally. Realistically, this is just another case of investor’s myopic behavior, as most previous rallies have been deemed “hated” at some point. It is prudent to avoid such behavioral biases, so in this article we will discuss this aspect of the stock market. First, we will look at previous bull and bear markets and the corresponding statistics, and then analyze subsequent performance after the start of a bull market.

Bull and Bear Markets Definition

To begin with, let’s start with the definitions of Bull and Bear Markets:

1. Bull Market: begins when stock prices rise by 20% from their previous bottom;
2. Bear Market: begins when stock prices decline by 20% from their previous top.

Another important concept is Correction: which is a decline of more than 10% but less than 20% from the previous top. However, the focus of this article will be large directional movements defined as bull and bear markets.

The most widely followed stock market index is the S&P 500® Index which is composed of the 500 largest publicly traded U.S. companies. Accordingly, we will focus on this index. The S&P 500® Index entered a bear market on June 13, 2022, when it fell from its high of 5,157 to 4,031, a decline of 21.83%. However, last week on June 8, 2023, the S&P 500® Index jumped from the 3,846 lows to 4,622, exceeding the 20% mark that defines a bull market.

The following chart shows a history of the bull and bear markets in the S&P 500® Index.

Source: Yahoo Finance, period: 1/1/1970 – 6/14/2023. Past performance is not indicative of future results.

In my opinion, there are two striking things about this chart. First, bull cycles tend to be much longer and more stable than bear cycles, which are typically characterized by sudden market drops. Second, it happens that a bull market may occur between two bear markets. This was seen in the aftermath of the dotcom bubble (circa 2000) and during the global financial crisis (2008-2009). These bull markets are sometimes referred to as dead cat bounces and are extremely challenging as investors face what is known as fear of missing out (FOMO), so real discipline is required.

Some Statistics on Bull and Bear Markets

In this section, we will focus on the statistics related to bull and bear markets.

Source: Yahoo Finance, period: 1/1/1970 – 6/14/2023. Past performance is not indicative of future results.

Some notes on the Returns show:

• Market Return (%): the return between start and end date;

• Max. Poss. Profit (%): the maximum possible profit by going long the S&P 500® Index at the start date and selling right at the top;

• Max Poss. Loss (%): the maximum possible loss by going long the S&P 500® Index at the star date and selling right at the bottom.

By way of introduction, remember that when we enter a bull market we are already 20% above the previous bottom. So, the maximum possible gain in the bull market of 466.92%, which started in 1988, would increase by roughly 20%, if you invested directly at the bottom of the previous bear market. The opposite logic applies to the bear market, as the largest drawdown in the 2008 financial crisis, for examples, was about -57% and not the -39.55% shown in the table.

In this table we can see the contrast between the length of bull and bear markets. For example, the longest bull market lasted 4,750 days (that is 13 years!). In contrast, bear markets are usually shorter, like the Covid-19 crash which lasted only 27 days.

Returning to the topic of bull markets during the dotcom bubble crash and the global financial crisis, we notice something extremely interesting. These are the only two bull markets that had negative returns of -18.59% and -15.35%, respectively. That is, shortly after the market rallied by more than 20%, it fell again, in this case by well over 20%, as it re-entered the downtrend into a bear market.

At a time when the macroeconomic environment remains uncertain and central banks continue to tighten monetary policy, it is important to remember this experience as we have just entered a new bull market.

The Start of a Bull Market and Subsequent Performance

In this final section, I think it is useful to analyze the subsequent performance of the S&P 500® Index after it enters a bull market. The following table lists S&P 500® Index bull markets and the subsequent returns from the start date for different time periods:

Source: Yahoo Finance, period: 1/1/1970 – 6/14/2023. Past performance is not indicative of future results.

The first observation to highlight from the table is that bull cycles tend to be relatively long, averaging 1,963 days, which is equivalent to almost 5.4 years. However, it is important to note that the duration of bull markets can vary significantly with the shortest bull market lasting 75 days while the longest taking 4,750 days.

Another intriguing finding is that during the first week and month following the start of a bull market, the S&P 500® Index, on average, delivers negative returns of -1.53% and -0.86%, respectively. Out of the six bull market instances examined, only three experienced positive returns in the first week. These findings suggest that the market often faces challenges maintaining its upward momentum during the initial stages of a bull cycle.

However, what truly catches attention is the long-term performance of bull markets. Except for one instance, all bull markets resulted in positive one-year returns. Furthermore, in six out of the nine cases, these returns exceeded 15%. With an average one-year return of 19% following the start of a bull market, it’s hard not to experience the fear of missing out (FOMO).

Now, the question arises: What do you think about the current bull market? Will it be a dead cat bounce, or will it return to its secular bullish trend? Leave your opinion and assessment in the comment section below!

Sources

Data Source: Yahoo Finance

Code Source: GitHub Page

Cover Image Credits: © squeakymarmot / ID: 7525666826 / Flickr.com

Disclosure:

The information provided on Vasconomics.com is for general informational purposes only and should not be construed as financial advice. The content on this blog is based on the author’s personal opinions and research, and it may not be applicable to your individual financial situation. It is always recommended to consult with a qualified financial professional or advisor before making any financial decisions. The author and Vasconomics.com disclaim any liability for any losses or damages incurred as a result of the information provided on this blog.

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