The current bull stock market is now six years old and it will start its seventh year on March 9th. As of March 6th, the S&P 500 stock price index has risen by 206% from the last bear market through of March 9th, 2009. This gain implies that the current bull market recorded a larger increase and rose for a longer period than most of the previous bull markets over the past fifty years. In fact, the current bull market has recorded the second longest duration and the second largest percentage increase. While the duration of the current bull market has well surpassed the historical average of about four years, there is no way to predict how long it will last. But we do know that this bull market will eventually come to an end and a new bear market will arise.
In December 2010, the Forecasting Advisor began to calculate in real-time the probability for the S&P 500 stock price index of entering a bear market phase with its proprietary stock market cycle model. In practice, this means that at the start of each month the probability of entering a bear market was calculated for the current month and the subsequent month, using a number of U.S. economic indicators, such as a proprietary coincident index of economic activity, the unemployment rate, interest rates, the price-to-earnings ratio, and consumer confidence. (The model predicts the start of a bear market if the probability equals to or exceeds the usual 50% threshold. Otherwise, the bull market is projected to continue.) Figure 1 illustrates the performance of the model in predicting bull and bear markets over the past fifty years. The model does very well in predicting all the reversals from a bull (bear) to a bear (bull) markets during that period. On average, the model signals the start of a bear market with a lead of less than a month before its actual start and the start of a bull market with a lead of one month. A description of the model and its performance can be obtained from: http://www.theforecastingadvisor.com/background-papers.php).
There have been fifteen corrections of the S&P 500 price index since the launch, in December 2010, of the calculation of the real-time probabilities of entering a bear market. As shown in Table 1, the probabilities calculated prior to, at the beginning, and during each correction of the stock price index have always been well below 50% threshold. In other words, prior to, at the beginning, and during each correction, the model predicted that the S&P 500 price index would not enter into a bear market. The predictions turned out to be right as all the corrections were spread over a few months at the most and were followed by a recovery in the stock price index to new bull market highs. To sum up, the stock market cycle model correctly predicted the evolution of the state of the stock market over the past four years.
Near-Term Outlook for the U.S. Stock Market Cycle
The Forecasting Advisor stock market cycle model is used here to assess the risk of entering a bear market in the next two months. More specifically, the model calculates the probability for the S&P 500 stock price index of entering a bear market for the months of March and April. The probabilities were calculated on March 6th using a number of U.S. economic indicators, such as a proprietary coincident index of economic activity, the unemployment rate, interest rates, the price-to-earnings ratio, and consumer confidence.
As shown in Figure 2, the probabilities of entering a bear market in March and April are at zero per cent. Thus, the start of a new bear market is not hanging over our head for the time being, at least for the moment.
Looking forward, The Forecasting Advisor will continue to provide over the coming months unique intelligence on the probability of entering of a bear market at a time when economists and financial analysts expect the U.S. Federal Reserve Board to launch in June or September the first of a series of interest rate increases. The next bear market probabilities will be calculated on April 3rd and they will be for the months of April and May
© Robert Lamy, The Forecasting Advisor.
