Published May 26, 2017
One of the frequent narratives about this stock market is how it just keeps on rolling higher and must soon change its character. That there is a gravitational pull that will bring it back to something lower – e.g. a more “reasonable” valuation, a reset of time, etc. In consideration of the notion that this bull market is now some eight years old, we offer the recent article from market observer Mark Hulbert discussing whether this bull market is indeed quite as old as some might argue:
“Any of a number of things can cause bull markets to come to an end, but old age is not one of them.
That’s important to remember because, even as the S&P 500 and many other major market averages reach new all-time highs, there’s widespread concern about how old the current bull market is. The unspoken narrative is that at some point a bull market gets so old that it simply keels over dead.
Yet I could find precious little statistical support for this narrative. To be sure, the statistics involved are tricky, since it is undeniably — though trivially — true that all bull markets eventually come to an end. One could easily construct a statistical test in which the probability of a new bear market approaches 100% when the prior bull market’s age approaches certain thresholds.
But that would prove nothing. A more helpful measure is the probability that a new bear market would begin in the subsequent calendar month. This puts a time limit on how soon a bull market will die. And there is no statistically detectable correlation between such probabilities and a bull market’s age.
I reached this conclusion by focusing on the calendar of bull and bear markets maintained by Ned Davis Research, which extends back to 1900; my findings are summarized in the chart below. When past bull markets were less than one year old, for example, there was a 5.4% probability at any given time that a new bear market would begin within the next calendar month. For bull markets that were more than five years old, in contrast, the comparable probability was actually lower — at 4.6%.
Chat 1: Bull markets don’t die of old age
Before you make anything of this, however, you should know that the differences plotted in the accompanying chart are not significant at the 95% confidence level that statisticians typically use when determining if a pattern is genuine.
You furthermore should exercise great care to avoid concluding that my data gives the bull market a new lease on life. Yes, the probability a bear market will begin in the subsequent month is always low. But that doesn’t mean the current bull market is on sounder footing than it was before you read this column.
All that the data actually show is that age in and of itself is not a reason for you to worry. All non-age factors for such a concern remain every bit as relevant.
While I’m on the subject of the bull market’s age, you should also know that the bull market we’re currently in did not necessarily start on Mar. 9, 2009 as many say. In fact, according to the rigorous criteria Ned Davis Research employs for determining when bull markets begin and end, there have been TWO bear markets since 2009: between April and November 2011, and between May 2015 and February 2016.
Per their calendar, therefore, the current bull market is just 15 months old. That’s a far cry from the 8+ years assumed by those who date the current bull market back to March 2009. So even if sheer age were a reason why bull markets die, you wouldn’t need to worry about the one we’re in now.
Needless to say, you can disagree with Ned Davis’s bull-market calendar. But my experience is that many who insist that the bull market began in March 2009 have selective memories, forgetting that some major market averages fell by more than 20% in those two periods: April to November 2011, and May 2015 to February 2016.
The bottom line: Those who argue that the bull market might die of old age are betraying more information about themselves and their preconceived notions than they are revealing anything objectively important about the stock market itself.”
Stocks began the week continuing to gain back the ground they lost in the recent one-day market slide, a near -2% tumble presumably brought about from an article suggesting President Trump sought to interfere in an FBI investigation. If Trump is playing a weaker hand, the speculation goes, odds of his tax reform agenda being implemented diminish considerably. That may or may not be true. For that one day last week, investors determined it was time to sell, sell, sell. But it was only a one-day wonder so far and this week investors recovered the lost ground and more as the noise of the meddling and tax reform faded into the background. Stocks popped higher +0.5% Monday with news focused on a large defense deal between the U.S. and Saudi Arabia. Stocks ran in place Tuesday on little news flow with the S&P 500 returning to test the 2400 level. The market pushed a touch through that level Wednesday with investors focused on minutes from the Federal Reserve’s most recent meeting. With the Fed shifting toward reduction of their balance sheet and away from a focus on interest rate hikes, investors were seeking to better understand the Fed’s plan. Investors seemed comfortable with the minutes adding another +0.25% to the stock market. Stocks added +0.4% Thursday despite a slump in crude oil prices as investors in that space sold the news of an extension of OPEC oil production cuts – oil prices had surged in the two weeks prior to the OPEC meeting. Investors left early Friday for the Memorial Day weekend satisfied to have marched stocks to new high ground and overcome the prior week’s slide. Friday was a listless, flat effort as a result.
For the week, the S&P 500 (SPY) gained +1.44% with the Nasdaq 100 (QQQ) rising +2.45%. Small-cap stocks (IWM) continue to routinely lag with a +1.10% lift for the week.
Warm wishes and until next week.