History tells us that investments can go down as well as up. It’s a well-worn, renowned disclaimer designed to provide a caution to all; they don’t always go the way you want them to. Less well known is the pattern the financial markets have followed throughout history. In the financial world, this pattern is referred to as Bull and Bear Markets.
It may be too obvious to explain that Bull follows Bear, and Bear follows Bull, but perhaps slightly less obvious is that there are four stages to the pattern. Growth and Peak; representative of a Bull market and Contraction and Trough; representative of a Bear market.
A significant feature of the pattern is that the ‘Growth’ period is almost always slow and long. The contraction period is more often than not alarmingly quick, like falling off a cliff straight from Peak and Trough. Interestingly, the recovery period between Trough and Peak tends to be a complete reverse, taking an agonisingly slow time to climb back up.
The chart below shows the pattern that US and UK stocks have both followed over the last 80+ years. It demonstrates that Bull markets tend to last an average of 6-7 years, with a cumulative average return of over 200%. Conversely, Bear markets often last less than 2-3 years, but with a cumulative average loss of -36%.
The economic recession in 2008 was the last Bear market and remains etched in our memories. It delivered a cumulative Contraction and Trough fall of -41% and started less than five years after the previous Bear market in the late 90’s, which at the time, abruptly curtained 12 years of prosperity with a similar cumulative fall of -43%.
In the current Bull market, as we start enjoying our tenth year of continued growth, there’s undoubtedly an abundance of economic uncertainty. But if there’s one thing from the past that we can deduce, it’s to take the growth we have enjoyed over the last nine years and find a way to protect it.
No-one can predict the future, but history clearly teaches us that we can reasonably predict a battle with a Bear market is on its way.
Common wisdom is, if you pick a fight with a Bear, you’ll lose! Protect yourself.