Historical Stock Market Analysis – Appreciating The Longest Running Cyclical Bull Market Within A Structural Bear Market Ever by Eric Bush, Gavekal Capital
Before we dive into an in-depth historical stock market analysis, let’s get a few data and definition questions out of the way:
- We are using Dow Jones Industrial Average (DJIA) price data. DJIA is the longest running, continuous stock market index in the US.
- We are using Shiller CAPE P/E data for valuation data. The DJIA doesn’t have earnings data prior to 1929 and consequently, valuation ratios cannot be calculated.
- Structural Bear Market – The market is in a structural bear market from the time it makes a valuation peak until it reaches single-digit valuation levels for a sustained period commensurate with other bear market valuation lows.
- Structural Bull Market -Begins off the bear market lows and continues until a valuation peak is made.
- Cyclical Bear Market – Any price drop greater than 20% from a recent high
- Cyclical Bull Market – Any price gain greater than 20% from a recent low.
- Cyclical bear/bull markets exist within structural bear/bull markets.
- Latest data is as of 6/30/2015
According to our work, the US stock market is currently in the longest running cyclical bull market that has ever taken place in a structural bear market. We are currently in the 6th year of the cyclical bull market. No other cyclical bull in a structural bear has ever made it past five years (the prior longest was from October 2002 – October 2007). However, our current gain of 157% off the March 9, 2009 low, is actually only the second largest gain for a cyclical bull in a structural bear. In 4+ years, from from July 1932 – March 1937, the market gained 261% even as it was in the middle of a structural bear market. With this in mind, it is clear that the stock market is undoubtedly in a historically unique position (not even mentioning the unique monetary environment that exists today as well) and we believe investors are well served in understanding today’s unique environment in the context of the US stock market going back to 1900.
Structural Bull and Bear Markets
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Using the definitions above, there have been four bear structural bear markets (including our current one that started in January 2000) and three structural bull markets since 1900. The dates for the structural bear markets are: January 1990-August 1921, September 1929 – April 1942, February 1966 – August 1982, January 2000 – Today. The dates for the structural bull markets are April 1921 – September 1929, April 1942 – February 1966, August 1982 – January 2000. The longest market cycle was the bull market from April 1942 – February 1966 which lasted nearly 24 years. The shortest market cycle was the bull market from August 1921 – September 1929 which last a little over 8 years.
Structural Bull/Bear Market Cumulative Performance
The average duration of a structural bear market has been 4,331 days with the market declining on average over the period by just -12.1%. However, the average max drawdown in a structural bear market has been -52.6%. The largest max drawdown occurred in the 1929 structural bear market as the market declined by -88.4% from the 1929 high. The average duration of a structural bull has been 4,288 days. It is interesting that the average duration for structural bears and structural bull would be so close. The total performance, on the other hand, is very different. The average total performance for a structural bull market is a whopping 945.6%.
Structural Bear Markets
Structural Bull Markets
Cyclical Bull and Bear Markets
There have been 22 cyclical bear markets and 23 cyclical bull markets going back to 1900. 16 of those 22 cyclical bear markets have occurred during a structural bull market. Surprisingly, more cyclical bull markets of occurred during structural bear markets than in structural bull markets. 14 out of the 23 cyclical bull markets have occurred during a structural bear market.
Cyclical Bear Markets
Cyclical Bull Markets
The average duration of a cyclical bear market has been 401 days, while the average duration of a cyclical bull market has been over twice that at 920 days. One thing that become clear in this analysis is that the old stock market expression of riding the escalator up and taking the elevator down is true. Cyclical bear markets, whether within a structural bull or bear market, are relatively short but painful experiences for investors. There have only been two cyclical bears that have reached at least 3 years while there have been 11 cyclical bull markets that have lasted at least 3 years. There have also been three cyclical bull markets that have lasted at least 8 years.
The average performance of a cyclical bear market is -37.5%. Even if we exclude the largest outlier, the 89% drop of the 1929 high, the average performance is still -35%. The average performance of a cyclical bull market is a robust 133%. There have been five cyclical bull markets with gains greater than 200%.
Cyclical Bear Markets
Cyclical Bull Markets
Cyclical Bull/Bear within Structural Bull/Bear Markets
The average duration of a cyclical bull within a structural bull is long at 1299 days while the average duration of a cyclical bear within a structural bull market is just 189 days. However, the average duration of a cyclical bull within a structural bear market is 630 days while the average duration of a cyclical bear within a structural bear market is 481 days. So in a structural bull market, cyclical bulls last much longer than cyclical bear markets but in a structural bear market, cyclical bull markets have a duration much more similar to that of cyclical bears.
The performance of a cyclical bull within a structural bull or bear is very different as well. A cyclical bull within a structural bull market delivers, on average, 187% gain and the cyclical bull lasts at least one year and can last as long as 8 years. A cyclical bull within a structural bear market delivers, on average, only a 99% gain, with most cyclical bulls only lasting about two years. Again, the longest ever cyclical bull market within a structural bear market is our current bull market.
Cyclical Bull Performance Within A Structural Bull Market
Cyclical Bull Performance Within A Structural Bear Market
A cyclical bear is a much tamer beast if it occurs within a structural bull market. Cyclical bears within a structural bull market have, on average, declined by -24%. And only once, starting in May 1946, has a cyclical bull within a structural bear lasted longer than a year. A cyclical bear within a structural bear market, on the other hand, is a nasty experience for investors. On average, a cyclical bear within a structural bear market experiences declines of 42% on average and in all but one cycle, the cyclical bear market lasts for at least a year.
Cyclical Bear Performance Within A Structural Bull Market
Cyclical Bear Performance Within A Structural Bear Market
- There have been four structural bear markets (including the one we are currently in) and three structural bull markets since 1900
- The average max drawdown in a structural bear market is -52.6%
- The average performance gain in a structural bull market is 945%
- There have been 22 cyclical bear markets and 23 cyclical bull markets
- Cyclical bull markets, on average, last over twice as long as cyclical bear markets
- The average performance of a cyclical bear market is -37.5%
- The average performance of a cyclical bull market is 133%
- A cyclical bear within a structural bull market is a much tamer beast, both in terms of drawdown and duration, than when it falls within a structural bear market