Equity markets around the globe remain in the midst of an historically very rare bull market (in terms of length) that can trace its roots back to early March 2009 a few months after the US Federal Reserve rode in to rescue of the global financial markets through their unprecedented monetary easing policies.
Prior to the Fed’s intervention, the markets had been in the grip of what would become to be coined as “The Great Financial Crisis” – an environment where there was a credit crunch not seen since the Great Depression. Many respected commentators, including the then Treasury Secretary and ex Vampire Squid head Hank Paulson, actually felt that the financial system was in danger of grinding to a complete halt.
The Fed and other global central banking counterparts in developed economies, more specifically Europe and the UK used not only the “tried & trusted” formula of low interest rates and substantial additional liquidity to ease the global economic suffering but, also for the first time ever, collectively deployed unconventional monetary policy measures (or QE as they become known) on a major scale. This was evidence indeed that we really were on the precipice.
That program of simply printing (albeit electronically) money, making regular asset purchases of bonds and providing enhanced liquidity in fact continues to this day in the USA – some 5 years later. Although the Fed is trying to bring its unconventional support for markets to a conclusion through its tapering of bond purchases which began at the end of last year, many in the market sense that the ECB (which has so far resisted resorting to “unsterilized” QE) may finally be about to pull the trigger…
Whatever the rights and wrongs of the use QE, one cannot argue with the fact that it has been supportive of equity valuations particularly in developed markets and none more than the USA (see S&P 500 monthly chart below).
As the bull now moves well into its fifth year, it seems an appropriate juncture to compare the current bull trend with its predecessors and see if we can glean any insight into how much longer it is likely to continue for…
5 Years marks the hurdle
According to data collated by the respected US financial magazine Forbes, there have been 16 Bull markets experienced by the S&P 500 during the course of the last 80 years. The average duration of which has been 3.8 years, however a run of four years or more is not without precedent. In fact there have been 5 bull markets that lasted 4.5 years or longer. Interestingly (perhaps tellingly) two of those five bulls and which could be thought of as “ Super Bulls “ started in 1982 and 2002 respectively and expired on or close to their fifth anniversary.
The other three did continue on, with the longest duration being the monster Bull run from 1990, extending to a massive 9.5 years as the peace dividend from the fall of the Berlin Wall and a prolonged period of global economic expansion commenced. One should note that things did not end well for the classes of 1982, 1990 and 2007 (the remaining 3 referred to hear that passed 5 years).
It was not all plain sailing for other historical bull runs though. The table below (source Forbes.com) plots the number of 5% corrections endured by each of the super bull markets. The Forbes analysis concluded that sharp corrections become more frequent as the longevity of a bull market extends beyond 4.5 years. A line in the sand that the current market has comfortably exceeded and is perhaps explained by rising nervousness on behalf of market participants eager to protect their gains aswell as the “Johnny come late’s and nervous hands” that are more twitchy on sell offs.
This is not the only study into the duration of Bull Markets that should give investors pause for thought. It is in fact a subject that has occupied the minds of market strategists, tacticians and academics for many years. One of the most widely cited pieces of academic research on the subject was conducted by Asger Lunde & Allan Timmerman in their paper “Duration Dependence in Stock Prices”.
Another well respected piece of research on this subject was conducted by Alexander Gloy of Lighthouse Investment management. Gloy found in his study that on average bull markets lasted for 5.15 years (Gloy defined a bull market as an uptrend without any pull-backs of 20% or more and this resulted in 10 identified bull markets that fitted this criterion)
Gloy and the Never Ending bull market
Gloy also contends, perhaps controversially, that almost 90% of the performance in a bull run can be linked back to its duration. Or, to put it simply, stocks go up because they have already done so for some length of time & thus the longer the duration of that length of time the higher the propensity for stocks to go up. If one takes that to its logical extreme however you end up with an exponential curve and never ending bull market.
That is what we might consider to be a self-reinforcing relationship, or if you prefer, crowd like behaviour that is common to all bubbles. That finding tallied with the earlier work of Lunde & Timmerman who also found that momentum was a key component of bull market performance.
Gloy also undertook regression analysis on those bull markets in his study and found that his data had a correlation with an R Squared measure of 0.89 (R squared is a statistical measure which quantifies how well data fits a statistical model particularly forward looking or predictive models. The scale ranges from 0 to 1).
Using Gloys work, it’s possible to make a prediction about the duration of the current bull market and the figure arrived at is 1878 days. That number suggests that the current bull market could end on the 30th Of April 2014.
We are not expecting a global cataclysm in the next 24 hours and likely as not the deadline will pass without incident as did the “Millennium bug” and the end of the Mayan calendar!
What the deadline should do however is focus investors’ attention on the fact that we are most likely in the very latter stages of the lifetime of this bull market. There is at the very least a cyclical correction due, and at worst, another major shakedown. We do not know the catalyst for this and in many historical instances, selling can simply arrive out of the blue. Still, with geopolitical tensions high, China likely on the cusp of its own major credit crunch and seasonality against the bulls, it pays to be cautious and vigilant.
Here at Titan we are likely to play this through the construction of an option put spread to enable us sleep easy IF we are wrong on the timing.
To download a special SBM report on the points raised here, click the image below.