Signs Of An Aging Bull Market

When investors hear “bull markets are bull markets until they aren’t,” their initial response is “no, duh!.” However, if that statement is so obvious, why do we spend so much time in trying to predict the future? It is interesting that we are extremely skeptical of fortune tellers, palm readers and psychics but flock to Wall Street analysts and economists that are nothing more than “fortune tellers” in suits.  The reality is that no one is actually prescient. It is all a “best guess” with nothing assured except what “is.”

Currently, the bull market cycle that began in 2009 remains intact.  It is, what “is.” That trend is clearly shown in the chart below.

However, it is important to understand that what currently “is,” will not always be the case. The reason that “bull market” cycles exist is because of previous excessively negative investor sentiment. Like the snap-back of a rubber band, when investor sentiment is stretched too far in one direction it will eventually “revert” by an equal amount in the opposite direction. This is why for each and every bull market, there is a bear market. 

Again, this seems quite obvious. However, if it is so obvious then why are investors continually sucked into bull markets believing that they will last indefinitely only to be crushed by the subsequent bear market?

The following are some indications that we are well into an aging bull market cycle.  The older the bull market, the more susceptible to infection it becomes.

The current bull market cycle is now extremely long by historical measures. The chart below shows the historical length of economic recoveries (number of months) which drives bull market cycles, as compared to the subsequent market drawdown (percent decline) during the following recession.

There are only 5 economic recoveries that have lasted longer than the current “muddle through” growth cycle. The first was the economic recovery driven by massive government make-work projects during the Great Depression. The next was during the space race of the 60’s and the final three all occurred in the 80’s and 90’s as inflation and interest rates fell sharply following their peaks in the late 70’s.