Gavekal Capital: Putting This Bull Market Into Historical Perspective: History Suggests It's Extended

Thursday, July 10, 2014

Putting This Bull Market Into Historical Perspective: History Suggests It's Extended

Yesterday we wrote about the how the current price level of the S&P 500 was about one standard deviation higher than its four year moving average price level (last chart below). We noted the rarity of this event, but stated that this precludes neither further market gains nor weakness, based on history. Indeed, there have been five instances in which stocks rose to two standard deviations above their four year moving average and at least ten instances where 20% market declines occurred when prices were at or lower than one standard deviation above their four year moving average.

Today, we'll take a slightly different tack to try to put this current bull market into historical perspective. Instead of analyzing the S&P 500 we'll use the Dow Jones Industrial Average since we have price history going back to 1900.

In the table below we have sorted from largest to smallest all of the cyclical bull markets going back to 1900. In the leftmost column is the total percent change of the cyclical bull and to the right of that is the start date of the cyclical bull. The rightmost section indicates the cumulative performance after each anniversary of the bull market. For instance, the current bull market that started in March 2009 has seen the Dow advance by 159% to date, and as of its fifth anniversary it had advanced by 135%. The key takeaway here is that the current cyclical bull is the sixth largest in history in terms of total price gain. 


The next table below replaces the total performance column (the leftmost column) with the total duration (in trading days) of the cyclical bull market. From this perspective the current cyclical bull market is the fourth longest in history. It's also interesting to note that the only other two bull markets that had a larger gain as of their fifth anniversary were the 1921 bull that preceded the great depression and the 1982 bull that preceded the crash of 1987. In both cases the Dow went on to achieve significantly higher prices before eventually topping out.



No matter how one analyzes this bull market, either in terms of percent gain, duration or extension from its long-term moving average, history suggests that this bull is extended. There are precious few instances of bulls with larger price gains or longer duration, but they do exist and should not be ignored. For investors this means analyzing the pillars on which bull markets are created: liquidity, valuations and growth. Current conditions point to less liquidity, extendedvaluations based analyzing the median stock or cyclically adjusted valuations, and continued low growth.