February 2023: A Perspective on Secular Bull and Bear Markets
This article was originally written by Doug Short. From 2016-2022, it was improved upon and updated by Jill Mislinski. Starting in January 2023, AP Charts pages will be maintained by Jennifer Nash at Advisor Perspectives/VettaFi.
Bull vs. Bear Market
A bull market occurs when stocks are rising, the economy is expanding, and there is overall optimism towards market conditions. On the contrary, a bear market occurs when stock prices are falling, the economy is contracting, and there is overall pessimism towards market conditions. There are a handful of theories as to where the "bear" and "bull" names originated from for describing the stock market but the one that I find the most helpful is that they are derived from the way the animals attack their opponents. A bull thrusts its horns up in the air; a bear swipes its paws down.
Let's examine the past to broaden our understanding of the range of historical trends in market performance. An obvious feature of this inflation-adjusted series is the pattern of long-term alternations between uptrends and downtrends. Market historians call these "secular" bull and bear markets from the Latin word saeculum "long period of time" (in contrast to aeternus "eternal" — the type of bull market we fantasize about).
The key word on the chart above is secular. The implicit rule we're following is that blue shows secular trends that lead to new all-time real highs. Periods in between are secular bear markets, regardless of their cyclical rallies. For example, the rally from 1932 to 1937, despite its strength, remains a cycle in a secular bear market. At its peak in 1937, the index was 29% below the real all-time high of 1929. For a scholarly study of secular bear markets, which highlights the same key turning points, see Russell Napier's Anatomy of the Bear: Lessons from Wall Street's Four Great Bottoms.
An alternate view of secular trends is offered by Ed Easterling of Crestmont Research. See his fascinating study Understanding Secular Stock Market Cycles, which made a persuasive case that we were in a bear market for over sixteen years that begin in 2000. The underlying principle, in Easterling's view, is the price/earnings ratio, which remains lofty.
If we study the data underlying the chart, we can extract a number of interesting facts about these secular patterns (note that the table below includes the 1932-1937 rally):
Since that first trough in 1877 to the November 2021 high:
- Secular bull gains totaled 2447% for an average of 408%.
- Secular bear losses totaled -325% for an average of -65%.
- Secular bull years total 92 versus 52 for the bears, a 64:36 ratio.
This last bullet probably comes as a surprise to many people. The finance industry and media have conditioned us to view every dip as a buying opportunity. If we realize that bear markets have accounted for just over 35% of the highlighted time frame, we can better understand the two massive selloffs of the 21st century.