martes, 27 de marzo de 2012

A Bull Market?

Three years ago stock markets took off. Bull markets usually last less than 4 years. Are we nearing the end of this bull's run? Maybe but, then again, maybe not. Between late April and early October of last year, the S&P 500 lost 19.4%. A market becomes a "bear" when the drop is 20% or more. Measured by closing prices, we didn't have a bear market but if you look at the index during the trading day, last October 3, the S&P 500 dropped more than 20%.

There are some other signs that this year's run-up might be the first year of a new bull market rather than the fourth year of the 2007 bull. One is that shares of technology firms, small companies, and consumer discretionary stocks do best at the beginning of a rally. That's true now. Typically, consumer staples and health care and utilities are leading the market in an aging bull market. That's not the case now.

The biggest gains in a bull market are generally made in the first year of a rally. Since World War II, the gain in the first year of a bull market has averaged 38%. Since October 3, the S&P 500 is up 27%.

If you were ever tempted to think that a bull is a bull, disabuse yourself of the notion. There are different kinds of bull. There are cyclical bull markets and secular bull markets. The former accompanies a single economic expansion. A secular bull market encompasses both bull and bear markets and can last more than a decade. Historically, at the beginning of a secular bull, P/E ratios are in single digits; that's not the case now. The last secular bull market ran from 1982 to 1999.

There are also "non-economic rallies" (NERs). NERs are rallies following a bear market that don't coincide with recessions. The historical record since World War II tells us NERs are shorter and more muted than a bull market. On average, they last 31 months (compared to over 3 years) and the median cumulative return is a bit less than 62% (compared to the nearly 102% median return of a bull market when the economy is coming out of recession).

What kind of bull is this?

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