Ever wonder what financial markets and the weather have in common? Predicting both is a terribly thankless and often futile pursuit.
If the newest version of SuperDopplerAccuSomething says it’s going to snow and no snow comes, the public outrage seems to rival that following inaccurate market predictions. I always envision villagers of some medieval town crowding the town square, torches upheld, calling for the heads of investment advisers who dared extrapolate historical data to project expectations of the markets.
What goes up
The beginning of this year has seen a substantial leap in market valuations, and a number of records have been broken as indices jettison beyond historic highs. What better time to consider market cycles than a time like this?
Most investors (and many advisers) do not know why we use the terms “bull” and “bear” to refer to different market environments. When a bull attacks its prey, it does so with an upward swing of its horns, whereas a bear strikes down its prey with a downward swipe of its claws. You can see why a bull market is characterized by an upturn in market valuations while a bear market is characterized by a downturn in the market.
The phrase “bull market” can be used to describe the upward trend in prices for individual securities, market indices or the markets as a whole. When described as a “primary market trend,” a bull market is characterized in the broadest sense by strong price support across most sectors for at least one year.
Still, bull markets often last for three to four years, and they are inevitably followed by bear markets, which often last for eight to nine months.
It’s a bird, it’s a plane, it’s …
Interestingly enough, not all bull markets remain confined to a three-to-four-year period. In fact, enough bull markets have outsized their normal expected confines to warrant the moniker “Supercycle Bull Market.” No cape, no superpowers, simply extended market gains and burgeoning growth in valuations over 12 to 15 years.
Two of the greatest bull markets in the history of U.S. equities ran from 1860 to 1872 and from 1920 to 1928, and we all know what happened in 1929. The last Supercycle Bull Market began in 1982 and lasted for 18 years, widely viewed as powered by President Ronald Reagan’s tax cuts, low inflation and technological innovation.
Analysts interested in making a case for an imminent bear market are quick to point out that, after the secular market highs of 1907, 1929, and 1968, a full 20 to 30 years passed before stocks recovered their old highs. Following the most recent market highs, these analysts may warn today’s investors to be wary of the possibility of valuations being struck down by the metaphorical bear’s claw.
A generally accepted description of bear markets involves a measurable decline in security valuations (20 percent or more) over a fixed period of time, normally over at least a two-month period.
From its tipping point in 1929 through July 1932, the Dow Jones industrial average lost 89 percent of its market capitalization. The Nasdaq’s decline from its high in March 2000 to its low in October 2002, known as the bursting of the dot-com bubble, saw an evaporation of 78 percent of its value. And more recently, the Dow Jones industrial average lost nearly 55 percent of its value from its peak in October 2007 to its trough in March 2009.
A case for the next Supercycle Bull Market?
Amid the recently rising markets and the strengthening confidence of American consumers, it is a little too easy to fall victim to unbridled enthusiasm and invest at a market high. Given the remarkably obvious headwinds to the U.S. economy (unchecked and increasing deficits and debt, Eurozone contagion, etc.), many investors still intend to wait out what they believe to be an inevitable bear market following the bull market from 2009 through now.
If it’s any consolation, in October 2012, before the recent record-breaking market performance, the founder and chairman of Investor’s Business Daily, William O’Neil, predicted the possibility of an imminent Supercycle Bull Market. O’Neil points to previous Supercycle Bull Market drivers, such as innovation (i.e., today’s domestic energy boom due to hydraulic fracturing), among other indicators.
Yet even he concedes, “Personal opinions are worth nothing. You’ve got to have buy rules. You’ve got to have sell rules. You’ve got to have market rules.”
Anthony M. Conte is a managing partner of Conte Wealth Advisors, with offices in Camp Hill and Fort Myers, Fla. He has a master’s degree in financial services as well as the certified financial planner certification, and he welcomes your emails at firstname.lastname@example.org.
Registered Representative Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors LLC are not affiliated.