A bull or a bear market? It does not matter.
The headlines and market analysis of recent weeks saying that stocks are in a bull market can be comforting, even if they are potentially misleading.
They are based on the irrefutable fact that the S&P 500 is up more than 20 percent since its last bottom, which occurred on October 12. News that the Federal Reserve expects further rate hikes this year weighed on the market. But if inflation, which was up 4 percent year-on-year in May, falls substantially, the Fed could keep interest rates steady or even begin to cut them — and the stock market could well continue to rise.
But is this really a bull market? It may eventually turn out to be one, but at this point there are some major caveats.
First, if a bull market to you means stocks are unequivocally rising, then the bull market label is being misapplied at this point. It is not at all clear what the trend of the market will be for the next month or year. Second, even as a retrospective measure of how the market has performed, this bull market designation is premature, with a stricter definition, one that seems much more sensible to me, as I’ll explain.
The popular definition
An oft-repeated definition — and one that I think is oversimplified and potentially dangerous — is that a bull market is one that has gained 20 percent from its last bottom. (Using the same logic, a bear market is one that is down 20 percent from its last peak.)
That sounds easy. It is sometimes called one “officially” definition, although it is nothing of the sort.
The main problem with that definition is that it seems to say something about where the market is going and not where it has been. It’s not really a bull market when you lose money. But investors who have been on the stock market since early last year have actually lost money.
Remember, to be classified as a bear market, the stock would have to be down at least 20 percent. That means a bull market would need at least a profit 25 percent wipe out losses in the bear market. (Say you have $1,000 in the market and it drops 20 percent to $800; it must gain 25 percent, or $200 to get back to $1,000.)
For investors who hold the broad market through low-cost index funds, like me, the simple 20 percent definition means you lost money since the market peak. To believe that this is a true bull market, you must assume that it will continue to rise. That’s magical thinking, and with the Fed signalling it plans to raise interest rates further, it is dangerous.
Wall Street makes money by being bullish. It benefits when people invest their savings in stocks. I have pointed out that annual Wall Street forecasts are extremely inaccurate, usually by being overly optimistic.
But after major market declines in bear markets, such as the one in 2022, they tend to be overly pessimistic. In December 2022, the median Wall Street forecast was that the S&P 500 would end 2023 at 4009, but the market is now well above that. As often do mid-year, when their forecasts are wrong, investment firms raise their forecasts late. Goldman Sachs did so on June 9 in a note to clients saying, “We are raising our year-end S&P 500 price target to 4500 (from 4000), which represents a 5% increase.”
Further bullish revisions by Wall Street firms are likely. But that doesn’t say much. In the event of a sharp fall in the market, the forecasts are adjusted downwards. Just because the market has risen doesn’t mean it will continue to rise – unless investors begin to believe it will and act on that optimistic belief, propelling the market higher and higher. A bull market built on emotional enthusiasm and unsupported by rising profits can easily turn into a bubble.
A history of vague metaphors
Bulls and bears and bells have been ambiguous metaphors for centuries. These vivid but imprecise terms were popularized in the 18th century by great writers – and miserable investors.
Alexander Pope, the poet, satirist and hapless investor, spoke of bulls and bears 1720 to describe his hopes for South Sea Company stock while it was still rising in price – and before it became notorious as the disastrous South Sea Bubble.
Pope’s flowery language and mythological references seem to strain the ears of the 21st century, but his basic meaning is clear: “Come, fill the cup of the South Seas full,” he wrote. “The gods will take care of our tribe: Europa contentedly accepts the bull, and Jupiter with joy deposes the boar.” In other words, let the good times roll!
But the bear soon triumphed.
Jonathan Swift, a friend and fellow satirist of the pope, wrote mournfully of a “mighty bubble” later that year, when South Sea supplies collapsed, the British economy shattered and the fortunes of thousands of foolish bulls – not just Pope and Swift, but also the genius physicist and inept investor, Mr. Isaac Newton.
The episode continues to be studied, generation after generation, although multitudes of new investors learn these hard lessons only through painful experience.
A sober solution
Save yourself some pain.
We are not going to abolish the terms bull and bear. They are too ingrained, overused and too convenient. But when it comes to categorizing and periodizing the stock market, there is a better way.
It’s the one used by Howard Silverblatt. He is a senior index analyst at S&P Dow Jones Indices, which manages and produces the two most famous US stock market indices: the S&P 500 and the Dow Jones Industrial Average.
Mr. Silverblatt, who has been in this industry for over 46 years, does not claim to put forth “official” definitions, but his position and experience make him as official as anyone in the market.
He says the S&P 500 be able to be in a bull market, but he will only declare it as a bull market after the index corresponds to its last peak, which was 4,796.56, on January 3, 2022.
Until that happens, according to his accounting and according to mine, this is still a bear market.
Note that this retrospective categorization of the stock market is similar to what the National Bureau of Economic Research does for the economy. The closest the NBER has come to being an official arbiter of recessions. It only issues a recession statement after one has started because it simply cannot be sure in real time on a system as complex as the US economy.
Are we in a recession now? There’s plenty of data, but we don’t even know that. Neither does the Federal Reserve. Still, it has to make decisions anyway as it sets interest rates.
Labeling recessions – and bull and bear markets – is critical to understanding what has already happened, but these labels aren’t all that helpful for acting now or preparing for the future.
An agnostic view
Mr. Silverblatt’s definition of bull and bear markets raises some doubt. But even once a bull market has been declared, by his definition, it’s not clear how that should affect your investment portfolio.
Paradoxically, I’m not even sure I hope we’re in a bull market.
That’s because I plan to keep investing for years to come. For example, if the market rises another 10 percent in the next month, which by definition puts us in bull market territory, I’m richer now. But suppose the market drops 30 percent in August and stays low for years.
In that case, the recent bull market announcements will be bitter memories, if remembered at all. It is always better to buy stocks cheaply and sell them at higher prices. Last year, when prices were 20 percent lower than now, was an excellent time to buy stocks. Now? It’s not as good as it was back then, even though the market is rising now.
Fortunately, long-term investors don’t have to time the market.
Instead of focusing on where stocks can go in the summer, remember that over periods of 20 years or more, the stock market has always gone up. But remember that within those periods it has often fallen sharply from time to time.
I try to close that circle by always being optimistic about investing for the long term, and nervous about what might happen in the next week, month or year.
Are we in a bull or bear market? It doesn’t really matter.
I’ll just try not to get swept up in mass frenzy when the market goes up, or totally freaked out when the market goes down. Bubbles can be personal disasters. But steadily diversified investing has been successful for centuries, through bull markets and bears.