Repeat after me: The current bull market did not begin in March 2009.
It’s important to repeat this over and over because almost all of the financial advisers I monitor believe that that’s when it did begin. If they’re right, and assuming it didn’t end in January at the market’s all-time high, the current bull market is the longest in U.S. history.
But they’re wrong.
As Humphrey Neill, the father of contrary analysis, insisted: “When everyone thinks alike, everyone is likely to be wrong.”
Take the stock market’s decline in 2011. From its high on May 2 to its low on Oct. 4, the S&P 500 dropped 21.6% — more than enough to satisfy the semiofficial definition of a bear market as a 20% or more decline.
Or what about the decline between May 2015 and February 2016? The Value Line Geometric Index of 1,700 widely-followed stocks fell 26%. The Russell 2000 index fell almost as much, shedding more than 25%.
In my experience, advisers respond in one of several predictable ways when confronted by these undeniable facts. They point out that, in 2011, the S&P 500 SPX, +0.24% did not meet the greater-than-20% decline criterion on a closing-only basis, and that the Dow Jones Industrial Average DJIA, -0.01% didn’t meet this threshold even on an intraday basis. As far as the May 2015-February 2016 decline goes, they point out that neither the S&P 500 nor the Dow fell by 20%, even on an intraday basis.
But who, exactly, preordained that the greater-than-20% threshold has to be satisfied by closing prices, or that both the S&P 500 and the DJIA have to satisfy and that other benchmarks don’t count?
Classification challenges like this one cry out for an objective definition. One firm that has responded to the clarion call is Ned Davis Research, defining a bull market as a 30% rise in the DJIA or the Value Line Geometric Index after 50 calendar days or a 13% rise in the DJIA after 155 calendar days. While you can quibble with this or that aspect of these criteria, I challenge you to come up with another objective definition that does a better job. Most who try their hand at doing so quickly find that their proposed criteria either determine that there have been too many or too few bull markets relative to what we traditionally assume.
In any case, according to the Ned Davis Research criteria, there have been 37 bull markets since 1900 with an average length of 25 months. Those criteria also conclude that we currently are in bull market that began on Feb. 11, 2016, which means that the current bull market is 27 months old — insignificantly different than the historical average.
That’s a far cry from over nine years old, of course. In fact, the Ned Davis calendar shows 12 bull markets since 1900 that lasted longer than the current one.
Why is this discussion important? I can think of three reasons:
•Many of the advisers who believe the current bull market began in March 2009 also argue that it’s in danger of coming to an end because of old age. But if the bull market began in February 2016, the current bull market is right in the middle of the historical distribution.
•Second, this discussion illustrates how our memories play tricks with us. Many advisers and investors are genuinely surprised to be told that the S&P 500 dropped more than 21% in 2011 or that the Value Line Geometric Index and the Russell 2000 index fell by more than 25% between May 2015 and February 2016. But those benchmarks very much did fall by that much.
•Third, this discussion illustrates the games we all too often play with statistics. If we try hard enough, we can probably torture the data to make it say almost anything we want. Take the notion that a 9-year-old bull market is more likely to come to an end than one that is 2 years old. This is only trivially true, since all past bull markets have eventually come to an end. But that doesn’t mean that the bull markets die of old age. You could just as easily say that night causes day, since the one always follows the other.
The bottom line: Make sure your analysis relies on hard data and objective analysis. Doing so doesn’t guarantee you’ll beat the market, but you can be guaranteed of lagging over the long term if your strategy is based on statistically bogus or insignificant analysis.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.