Of bulls & bears

Recent market turmoil has prompted several questions about the relative longevity of bull and bear markets. The above graph (produced by our friends at Dimensional) helps answer the question by plotting bull and bear market periods in the S&P 500 Index from January, 1926 to July, 2008. (Click the on chart for a larger version.)

The rising trend lines in blue designate the bull markets occurring since 1965, and the falling trend lines in red document the bear markets. The bars that frame the trend lines help to describe the length and intensity of the gains and losses. The numbers above or below the bars indicate the duration (in calendar days) and cumulative return percentage of the bull or bear market.

Investors may draw a number of lessons from this graph.

  1. Since 1965, bull markets in the S&P 500 Index have lasted longer than bear markets and delivered price gains that are disproportionately greater than the bear market losses.

  2. Fluctuating performance within each trend illustrates that volatility and uncertainty occur even within established market cycles: bull markets may have short-term dips, and bear markets may have short-term advances. The immediate trend is not readily apparent to market observers, and in fact, may become clear only in hindsight. This illustrates the difficulty of accurately predicting and timing market cycles.

  3. The graph suggests the importance of maintaining a disciplined investment approach that views market events and trends from a long-term perspective. Investors who react emotionally to short-term movements are at risk of making ill-timed decisions that compromise long-term performance.

On the methodology

Market cycles are identified in hindsight using historical cumulative returns including dividend reinvestment. All observations are performed after the fact. A bear market is identified when the market experiences a cumulative loss of at least 15%. The bear market ends at its low point, which is defined as the day of the greatest negative cumulative return before the reversal. A bull market is defined by data points not considered part of a bear market.

Keep in mind that this graph does not show total compounded returns or growth of wealth since 1965. Once the cycle is established in retrospect, the first day of that cycle resets the performance baseline to zero.