Bull Market 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.
S&P Composite Index Secular Trends
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.
S&P Composite Secular Trends with a Regression
Let's review the same chart, this time with a regression trend line through the data.
This line is a "best fit" that essentially divides the monthly values so that the total distance of the data points above the line equals the total distance below.
The chart below creates a channel for the S&P composite. The two dotted lines have the same slope as the regression, as calculated in Excel, with the top of the channel based on the recent 2021 peak and the low is based on the 1932 trough.
Historically, regression to trend often means overshooting to the other side. The latest monthly average of daily closes is 117% above trend.
For a more optimistic view, see Chris Puplava's assertion in The Secular Bear Market in Stocks Is Over. Chris's commentary includes some interesting demographic analysis based on the ratio of the higher earning, bigger spending age 35-49 cohort to less financially empowered age 20-34 cohort. Unfortunately, this ratio is being savagely trumped by a far more powerful demographic shift: The ratio of the elderly (65 and over) to the peak earning cohort (age 45-54). The next chart, based on Census Bureau historical data and mid-year population forecasts to 2060, illustrates this rather amazing shift.
In the chart above, the elderly cohort (red series) is dramatically increasing in numbers. The ratio of the two, the blue line in the chart, peaked in 2007 and began its long rollover in 2008, coincident with the beginning of the great recession. We have a few years to go before this ratio approximately levels out around 2030.
Even more disturbing is the elderly dependency ratio, the label given by demographers to the ratio of the 65 and older population to the productive workforce, which for developed economies is usually identified as ages 20-64. The next chart illustrates the elderly dependency ratio with Census Bureau forecasts to 2060. In this chart, I've followed the general practice in demographic research of multiplying the percent by 100 (e.g., the estimated mid-year 2016 elderly dependency ratio is 25.7% x 100 = 25.7).
As the chart painfully illustrates, the elderly dependency ratio is in the early stages of a relentless rise that doesn't hit an interim peak until around 2037.
This commentary focuses on price rather than total return. For a perspective on total returns across this timeline, see our periodically updated Total Return Roller Coaster.
The S&P 500's highest daily close was on January 3, 2022 at 4796.56 and it's highest peak for monthly averages of daily closes was in December of 2021 at 4670.42. However, it's highest peak for real monthly averages of daily closes was in November of 2021 at 5119.81.
ETFs associated with the S&P 500 include: iShares Core S&P 500 ETF (IVV), SPDR S&P 500 ETF Trust (SPY), Vanguard S&P 500 ETF (VOO), and SPDR Portfolio S&P 500 ETF (SPLG).
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 VettaFi | Advisor Perspectives
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