The Bull Market Cycle
A bull market is typically defined as a 20% or more increase in prices from a recent low. It also reflects strong investor confidence, optimism, and economic growth. It’s been more than three-and-a-half years since the current bull market began back in October 2022. At that time, inflation was increasing at its fastest pace in fifty years, the Federal Reserve was hiking interest rates, and ChatGPT was still a month away from being released to the public. It’s bizarre to me how fast our world can change. In just over three years, our way of life has shifted somewhat dramatically due to artificial intelligence. Many people have lost their jobs, while others have had to incorporate AI into how they complete tasks at work. Since late 2022, the S&P 500 has more than doubled in value, and the Bloomberg U.S. Aggregate Bond Index has fully recovered.
Wall of Worry
Despite the massive changes in the world, the presence of market concerns in news headlines has remained constant. Each market cycle brings new challenges and questions about whether the old-fashioned rules of investing are still relevant. The reality is that each cycle is unique, with sources of uncertainty that are almost never the same. When the market goes into correction mode, the wall of worry stands tall. Even though geopolitics continue to impact markets, perhaps the more important consideration for long-term investors is the overall market cycle.
With the market hovering around all-time highs, it is common for investors to worry about a potential pullback. Market corrections occur frequently, and a 5% pullback or worse happens four to five times each year on average. One key factor to remember is that while pullbacks are never pleasant, long-term investing depends more on historical patterns over decades, not weeks or days. We are currently involved in a conflict with Iran that has flooded the news. Oil prices are up, and the stock market has been volatile. Even with a war overseas, the S&P 500 is up over 5% year-to-date.
The chart below illustrates the pattern between bull and bear cycles starting during World War II. Over this 70-year stretch, bull markets have lasted far longer and generated larger gains than what is lost in bear markets. On average, bear markets have lasted one to two years, while recent bull markets have run as long as ten years or more. The average decline during a bear market is 14%, with the average recovery taking just four months.
While we know the past is no guarantee of future results...
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