Most of us are familiar with the terms, but how much do we actually know about bull and bear markets? And, perhaps more importantly, how long will the current bull market stick around?
What is a bull market?
A bull market is a market in which share prices rise, which encourages buying.
What is a bear market?
A bear market is a market in which share prices fall, which encourages selling.
When will this bull market end?
Given the length of the current bull market cycle, one of the longest on record, clients often ask this question. Spoiler alert: Being able to predict the end of the bull market cycle is difficult, if not impossible. Due to the length of the bull market, which has been big in gains, all the U.S. market averages currently are at or near record highs, so the desire to know when the advance will end is even more acute. That, coupled with the amount of people who have missed this terrific advance, makes answering this difficult question that much more pressing.
The good news:
We can provide some tips to look for that signal the end of the bull market.
The bad news:
Spotting the end of bull markets is nearly impossible.
There are many reasons bull markets end:
- Interest rates can advance unexpectedly, putting great pressure on business conditions.
- Inflation fears can appear and inflation expectations shift quickly, putting pressure on interest rates.
- An external shock like a military conflict, major change in trade, or geopolitical relations can all cause a recession, which would end the bull market.
As a market veteran, I pay very close attention to two things when I try to spot the end of a bull market cycle. First, I look at market pullbacks for clues. During market corrections, we attempt to determine if markets are pulling back because economic conditions are changing for the worse. If they are, then my recession fears or Spidey senses increase, and we could be heading for a bear market. Second, once companies start to factor in negative economic information in their earnings reports (i.e. reduce their forecasts and announce layoffs), we have an official bear market cycle. Therefore, when company CEOs start to hedge about the economic conditions, we know the recession is on its way, and the bear market is all but a foregone conclusion.
Bear market cycles don’t last long. The average is about 14 months, and the market generally turns halfway through. The Great Recession was different. We saw equities drop 40 percent and bond funds drop 25 percent as investors worried the world banking and financial system might fail. We don’t expect the next bear market to be as devastating. We are looking more for a standard bear market cycle caused by an earnings recession that will last 12-18 months. The hard part is, we cannot tell you with any certainty when this will take place.
In the meantime, if you are concerned about the next bear market and what it might do to your portfolio, we recommend clients review their portfolio allocation and shift to a more conservative allocation with less market exposure. While we understand most reading this article will find our answer unsatisfactory, I think anyone who claims to know exactly what is ahead for the stock market fails to understand how difficult it is to predict the timing of market or economic cycles with any level of certainty.
Randy Williams-Gurian is a wealth manager at HighTower Bellevue. Randy’s ability to explain the complex investing landscape in simple terms led him to author his own national newsletter and his insights on tech stocks and other investing how-to tips have earned him guest spots on CNBC.