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By any measure 2013 has been a great year to be invested in the stock market. Recently the S&P 500 (SPY) closed at 1781 after briefly breaking 1800, a nearly 25% gain since the first trading day this year. While many commentators believe that the market has gotten ahead of itself, I will make the case that 2013 has been a more or less average year for a mature bull market.

Personally, I always consider averages in order to put current market performance into its historical context. It is important to remember that bull markets are inherently above average. Consider this: if the market returns on average 10% per year, but falls substantially during a bear market cycles, the market must rise more than 10% per year during bull markets to achieve an average stock market return.

Ken Fisher in his book Markets Never Forget (But People Do), compiled all of the bull markets and bear markets that have taken place since 1929. Table 1 shows the past 13 bear markets that have occurred since 1929 and is reproduced from Mr. Fisher's book.

Table 1 - Last 13 S&P 500 Bear Markets

StartEndDuration (Months)Annualized ReturnCumulative Return
9/19296/193233-51.5%-86%
3/19374/194262-16.3%-60%
5/19466/194936-10.9%-30%
8/195610/195715-18.1%-22%
12/19616/19626-45.7%-28%
2/196610/19668-31.7%-22%
11/19685/197018-26.0%-36%
1/197310/197421-31.7%-48%
11/19808/198220-16.9%-27%
8/198712/19873-77.1%-34%
7/199010/19903-60.6%-20%
3/200010/200230-23.3%-49%
10/20073/200917-44.7%-57%
Average 21-35.0%-40%

Source: Markets Never Forget (But People Do) - K. Fisher and L. Hoffmans

It is worth noting that the average cumulative return during a bear market is -40%, while the average annualized return is -35%. In other words, during an average bear market your portfolio will fall on average 40% over a period that on average lasts 21 months.

Given this circumstance, how is it possible that the average stock market return since 1929 is nearly 10%? Consider Table 2, in which Fisher compiles the past 13 bull market cycles.

Table 2 - Last 13 S&P 500 Bull Markets

StartEndDuration (Months)Annualized ReturnCumulative Return
6/19323/19375735.4%324%
4/19425/19464926.1%158%
6/19498/195685

20.0%

267%
1/195712/19615016.2%86%
6/19622/19664317.6%

80%

10/196611/196826

20.0%

48%
5/19701/19733223.3%74%
10/197411/19807414.1%126%
8/19828/19876026.6%229%
12/19877/19903121.0%65%
10/19903/2000113

19.0%

417%
10/200210/200760

15.0%

101%
3/2009????????????
Average 5721.1%164%

Source: Markets Never Forget (But People Do) - K. Fisher and L. Hoffmans

Bull markets are longer affairs with the average bull market lasting 57 months (or approximately five years). During bull market years the market on average rises 21.2% annually, not too far off from the market's performance thus far in 2013.

If one is attentive to detail the following observation can be made:

  • The S&P 500 is in a bull market 73.1% of the time and during that time the market rises 21.1% over an average period of 4.75 years.
  • The S&P 500 is in a bear market 26.9% of the time and falls 35% annually with an average duration of 1.75 years during that time frame.

It seems like nearly every market participant is presently surprised that the market has generated a good return in 2013. However, the next time someone tells you the market is far ahead of itself you could summarize the main thesis of this article. 2013 has not been unusual, in fact it has been a very average and even boring bull market year.

It must also be noted that this market has had a duration approximately equal to a average bull market (nearing five years as I write this article). The total return is also equivalent to an average bull market. I do not consider this to be a good reason for bearishness by itself. Many bull markets have run well above the average. However, the easy money has been made and while many stocks are still attractively priced the rate of advance of the market will not continue indefinitely.

Intelligent investors should stay focused on well priced stocks that are likely to outperform the market, such as: Aflac (AFL), Canadian National Railway (CNI), Discover Financial Services (DFS), Hospira (HSP) and Teva (TEVA). Stocks that are reasonably valued are more likely to hold their value in the next inevitable bear market cycle.

Source: Year-End 2013: An Average Bull Market Year