History Is No Mystery: Part II

April 29, 2020

No Bull: Up Is Better Than Down

Bear markets are scary, although they are great opportunities to invest for the long term. It is way more fun to talk about bull markets. It isn’t always easy to tell when we are in one, and once everyone agrees that we are in one it isn’t always clear how long it will last. But those are good problems to deal with!

History Is No Mystery

As in Part I, I used the S&P 500 stock index daily data to examine the 13 major bull markets since 1933[1], and the National Bureau of Economic Research for dating the recessions. A bull market is defined as the period between the low of one bear market and the peak before the next bear market.

Part II: The Bulls

The length in years for each bull market, along with the year it started, is shown on the left side of the chart (in light grey) using the top scale. The percent increase is shown on the right (in blue) with the bottom scale. Although it is too early to call the current rally from the March bottom a bull market, it is shown in orange to provide context. I have also included data for the median (the value at the midpoint) for all bull markets that were preceded by recessions in dark grey and for all bull markets preceded by recessions since WWII in black. Looking at the last bull market in 2009, it started with the bear market low in March 2009, then peaked over 10 years later in February 2020, an increase of over 400%. The current 2020 advance from the bottom is only 1 month and a 30% increase, much smaller than the medians of 5 years and over 180% (both medians ended up being the same).

Chart 1

Source: Yahoo Finance, National Bureau of Economic Research, J.P. Morgan Asset Management

Months Not Years

Chart 2 shows that a rally of 25% from the low of the preceding bear market happens quickly, with the medians just 4 months. The rally in 2020 (not an official bull market) has been the quickest at less 1 month, just as the decline from February into the current low in March (see Part I Chart 3) was the fastest ever at 1 month.

Chart 2

Source: Yahoo Finance, National Bureau of Economic Research, J.P. Morgan Asset Management

Catching A Falling Knife

What happens if you buy too early? Assuming you bought at the halfway down point of the bear market, Chart 3 shows how long it took to get back to the midpoint or breakeven. For the 1933 and 1938 bull markets it took 4 years and 7 years, respectively (not shown). It has been quicker post WWII, with the medians around 6 months. For the post WWII cycles it took a rally of 13% to 68% (not shown) to get back to the midpoint. The current rally from the March 23 low to the midpoint of the selloff took only 1 month, a 27% increase.

Chart 3

Source: Yahoo Finance, National Bureau of Economic Research, J.P. Morgan Asset Management

But what about making some significant money, even if you bought too early? Assuming you bought at the midpoint in the preceding bear market, Chart 4 shows it takes much longer to make a profit of 25% on your investment. The medians show it takes almost 2 years from start of the bull market before you make a 25% gain, with the shortest time being under a year in 1982 to over 7 years in 1938. If 2020 is actually a bull market, you would have only made a 3% gain so far from the midpoint.

Chart 4

Source: Yahoo Finance, National Bureau of Economic Research, J.P. Morgan Asset Management

Adding It All Up

Let’s review what we learned about bull markets, using the medians, and what it means for 2020:

• Bull markets are long, lasting around 5 years.
• Prices go up a lot, around 180%, with the minimum increase 50%. The next bull market has a lot more room to run up.
• Price gains of 25% from the start of the bull market happen fast at around 4 months. If this is a new bull market, it took less than 1 month to happen.
• It takes about 6 months from the bear market low to break even if you had bought at the midpoint of the bear market. If March is the low for 2020 then it took only 1 month.
• It takes almost 2 years from the start of a bull market to make a 25% profit if you bought at the midpoint of the preceding bear market. If this is a new bull market, we have further to run.

The table below summarizes the levels the S&P 500 could reach based on the medians, and in the parentheses the percentage increase from the bear market low and from the current level. The Part I caveat applies: the numbers are not a forecast; they are what might happen using history as a guide.

The bottom line is that if the low for the current bear market was March 23, then bigger gains are likely, but it will take a few years to realize them.

S&P 500

Invest wisely,

Dave Schaffner, CFA

Principal, Wayfairer Capital Management Ltd.

[1] As noted in Part I, the small number of bull markets results in a high degree of estimation error for the medians.