COVID-19 Dethroned the Longest-Running Bull Ever

But be careful to avoid the preening duck that thinks it’s really a bull

Two days after its 11th birthday, on March 11, 2020, the longest running bull market in history ended abruptly. Born from the financial crisis on March 9, 2009, the 11- year old bull market was derailed by COVID-19 and the end was swift and painful.

Since the demise of the latest bull market, investors have seen market corrections, its bear market replacement, a market crash and a few bear market rallies. And with each bear market rally, the question on everyone’s mind is whether this is the bear market rally that will give birth to another bull. Or is it a duck?

Let’s examine a few definitions, review some history and see if the answer to that question might emerge.

The 11-Year Bull Market

Before we answer that question, let’s keep some perspective on the most recent bull market, which ran from March 9, 2009 until March 11, 2020:

• The markets dropped about 60% during the financial crisis of 2008/2009 and then the bull came out of the gates fast, jumping 37% in the first two months and 69% in its first year

• The best calendar year for that bull was 2013 when it gained 32.4%, followed by 2009 (+26.5%) and 2017 (+21.8%)

• The worst calendar year for that bull was 2018 when it lost 4.4%, breaking its streak of nine straight positive years

Bulls, Bears and More, Oh

My Every investor knows that his or her portfolio is at least partially at the mercy of the market itself, with overall market conditions playing a huge role in general gains and losses. Most investors also know the terms "bull market" and "bear market" used to describe these conditions, but not all of them truly understand the difference between the two, or what to do when one of them is present. Investors at any level should take note of these distinctions to make good investments and properly manage their portfolio, because the markets promise to constantly shift over time.

Whether or not you believe that the terms “bull market” and “bear market,” arose from the behaviors of these animals, the metaphor does make sense: a bull thrusts its enemies upward, while a bear prefers to knock its foes into the dirt.

The difference between the two types of markets is quite simple:

• A “bull market” comes when stock prices rise by over 20% from recent lows and then increasing investor confidence often helps sustain the continued rise.

• A “bear market” occurs when stock prices fall by over 20% from recent highs and then widespread pessimism often helps sustain the continued decline.

Looking at history, bear markets are typically shorter than bull markets. A bull market's average duration is about 3 years, while bear markets last on average about 18 months.

Corrections, Crashes & Booms

It is important to distinguish a bear market from a market correction, which is shorter in length and involves less of a market decline. A correction typically lasts less and involves stock market declines of about 10% – not the 20% fall in a bear market. And while corrections are almost universally used to describe 10% market declines, in theory the term could be used to describe 10% market advances too.

Stock market crashes, by contrast, are stock market corrections that happen in a single day – in other words, when stock markets decline by more than 10% in one day.

Stock market crashes, surprisingly, occur with a decent amount of frequency. But the ones that are known to most are the Great Crash of 1929, which consisted of market drops of 13% and 12% on successive days; Black Monday on October 19, 1987, which saw the market drop over 22% and of course March 16, 2020, which saw the market drop over 12%.

But using our glass-half full perspective, if we consider “Boom” to be the opposite of “Crash,” we have also seen eight Booms in the history of the DJIA, including one on March 24th. The “Booms” were as follows:

• March 15, 1933, up 15.34%

• October 6, 1931, up 14.87%

• October 30, 1929, up 12.34%

• March 24, 2020, up 11.37%

• September 21, 1932, up 11.36%

• October 13, 2008, up 11.08%

• October 28, 2008, up 10.88%

• October 21, 1987, up 10.15%

Of course, one hopes to distinguish a bear market rally from the beginning of a bull market. Maybe that’s what happened in April of 2020?

Could You Recognize a Bull?

It takes nothing more than common sense to conclude that a bull market tends to be fairly comfortable and prosperous for investors, while a bear market leaves most long-term investors feeling a bit anxious. But, knowing what to do when in the middle of a rising market can be daunting for sure.

The first challenge when facing a bull market is recognizing it. Because short-term trends can't predict whether the overall market will continue to rise or fall, it requires a sharp eye and a keen investor's instinct to be truly confident in one's moves when looking at a short period of time (less than a month, for example).

Fortunately, most financial advisors would likely agree that this determination can be made by a percent change in multiple indexes. If the change is at least 20% in either direction (rising or falling), the market can more safely be declared bull or bear.

Depending on how long an investor is willing to ride out the trend before making gut decisions, selling and buying comes at the risk of the market trending the opposite direction in the long term. The outcomes of such decisions sometimes feel arbitrary, making the saying of "playing the stock market" all too accurate.

Back to the Most Recent Bull

Let’s examine the most recent 11-year bull so that we remember that even if it simply went to sleep for a few months and wakes up to knock the current bear off of Wall Street, it won’t be a straight line up. Consider that the most recent bull:

• Delivered six 10% corrections, with the largest coming in late 2018 (down 19.8%) and in 2011 (down 9.4%)

• It went nearly four years without a 10% correction (2011-2015) and 2017's largest intrayear decline was a paltry 2.8%

Historical Bull Markets

Bull markets aren't caused by any one thing. In fact, there have been roughly just as many bull markets as there have been bear markets – about 25 – and each was driven by a variety of very different issues.

Some bull markets followed major military actions, others were driven by new technologies, some by rapidly rising housing prices and some are born from painful market crashes. Perhaps most interestingly, a bull market may even be brought on by the social consensus of investors themselves due to something called "investor psychology."

For example, some investors may be compelled to buy when others are buying (or sell when others are selling). By jumping on the proverbial bull market bandwagon and following others' lead, investors can create a swirl of activity that drastically affects the market.

Here are a few of the most recent bull markets:

Will a New Bull Be Born Soon?

The short answer is: no one knows. Please repeat that out loud: nobody knows.

A bull market is difficult to predict. Rising stock values might just be part of a bear market rally, as opposed to a new bull market.

Investors need to beware of the tendency to over-react to the thrills of a bull market (or the fears of a bear market). Far too often, individual investors try to time the markets, often buying and selling at the wrong times, and then are too frightened to act.

Whether you will participate in the next bull market depends on a lot: making sure you’re invested, the strength of your investments and the choices you make going forward. With careful planning, safe, long-term investments and a cool head, however, these obstacles can be surmounted. Ultimately, you as the investor will need to examine your own situation and investments to make that call.

But, history does consistently show us that bull markets are fueled by the fundamental combination of economic growth, rising corporate profits, and favorable interest rates – all of which mostly existed before COVID-19 showed up.

Since then corporate earnings have dropped substantially but are expected to rebound once COVID19 is much less of a threat (whenever that might be). It’s true that interest rates continue to be favorable, so that’s a plus. But unemployment numbers are staggeringly high and are unlikely to recede to pre-COVID levels as states begin to fully open back up.

So, how should you – as a long-term investor – proceed? By ensuring that your asset allocation is aligned with your goals and risk tolerance. And working with your financial advisor to make sure.

When is a Duck a Bull?

Finally, investors trying to answer the original question of whether we just witnessed a bear market rally that might launch another bull should heed the words of Warren Buffett, arguably the greatest investor of our time when he wrote this more than 20 years ago:

“In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond.”

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