It may not come as a big surprise to some of my readers that I tend to question the big market headlines. We all know, sensational headlines get clicks. In the past week I have seen numerous “Longest Bull Market in History” headlines. Both big and sensational! It inspires both a sense of joy along with a little bit of dread.
For fun, I read these headlines to see if I can spot truth or lies. It is one of my many strange hobbies, and as a fact checker, this made me really interested in finding out whether we really are in the longest bull market ever.
This brings me to the facts.
The previous market highs of the S&P 500 were 2,874.67, which was achieved on January 26, 2018. On Monday August 27th, we closed higher for the first time since January 26th. This could mean that the correction that began just after the January 26th high, is officially over (applause now). That does not mean we can’t have another one soon (boo hiss), but nor does it mean we won’t continue onward and upward for a bit longer.
The real question is how long?
First, we can use our “spider sense” (my kids love the Marvel movies) and the hypothesis that we are in the longest bull market ever. If that is true, the days are numbered according to my other super-power inspired attitude that “all good things must come to an end.”
However, the analysts at Ned Davis Research seem to read my mind and released a fact-based report regarding the assertion made that we are in the longest bull market complete with all the charts that make my heart beat a little faster.
First, we need to define some terms. Wall Street uses a rule of thumb to define a bear market. That rule says that a 20% decline in the S&P 500 from a previous high is a bear market. Any market that trends upwards without a 20% or greater drop is a bull market. Seems simple enough? 1
Most of the pundits count the October 11, 1990 – March 24, 2000 bull run as the previous record. However, one really fascinating thing is that this definition is based on a drop in the S&P 500 from July 16, 1990- October, 11, 1990 of 19.92%. It is rounded to 20% to get the bear market that if excluded means that the longest bull market would have been from December 4, 1987- March 24, 2000 which is over 12 years! 1
I’m not done yet. According to Ned Davis Research, the drop in the S&P 500 from April 29, 2000 – October 3, 2011 was 19.39%. Granted, the number rounds to 19% but the difference between 19.92% and 19.39% is 0.53%. Our daily moves are often more than that these days. The other interesting fact is that the 2011 drop was 157 days long. The one in 1990 was only 87 days. It seems to me that this should be taken into consideration and maybe we either include both or exclude both. 1
Ned Davis Research came up with a more reasonable way to define bull and bear markets that take into consideration both duration and price. They even gave us a nice chart for the past 118 years. Looking at it from this perspective, we can see that we might not be writing as much history as perhaps our pundit friends might want to lead us to believe. In fact, there are many that are much longer in history. Here is that table.
While this makes my “all good things must come to an end” argument irrelevant, we must look at the possibility of this continuing on from this point forward. To do that I like to look at the overall economy and use the output gap, GDP and inflation as one of the items I like to keep my eyes on.
One thing that remains of keen interest to me is the fact that inflation as measured by the Consumer Price Index, has continued the downtrend that began in the early 1980s. Even since the last peak in 2007, we are still quite a bit lower. When comparing the output gap, a measure of economic activity versus its potential, we are near the last highs we saw in 2006. At that time, the Consumer Price Index was at 3.4% versus today we are near the output range but only at 2.4% on the Consumer Price Index. GDP is still growing strongly. This means we could have room left to run if the Fed doesn’t raise rates too fast! Here is what that chart looks like.
Certainly, there remains some risk that we are nearing an economic peak. Looking at things from both the view that we are perhaps not in the longest bull market in history, inflation is not yet a problem and GDP is still growing, it is certainly possible that we have longer to run. How long? I don’t know. I wish I did. I do know that other environmental symptoms will develop that hopefully will help us develop this picture more and more! We will continue to bring you those items as we navigate the markets together!
1 No, This is Not the Longest Bull Market in History. Ned Davis Research Group. Ed Clissold, CFA and Thanh Nguyen, CFA. August 23, 2018.
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