Long-Term Stock Return Cycles And The S&P 500

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Todd Feldman

Summary

Long-term market cycles may give us a better key to understanding the current market.

I look at lost decades and bull market cycles to determine if the current US stock market is overvalued.

Results indicate we are still in the midst of a current bull market cycle.

A behavioral bias that is widespread among investors is that investors view equity prices from a short-term to medium-term view versus a long-term view. Currently, I am reading and hearing that many investors believe there has to be some kind of crash or correction because we have to have one after 10 years of a bull market. Some are calling for a large market crash to a major correction.

I personally like to view equity prices in terms of cycles or phases. Cycles play out over longer periods. The world moves in phases and I believe the stock market is no different. In this article, I go through the different cycles in the US equity market from the late 1800s until today. By doing so, one can see there exist periods of large stock returns and periods of lost decades. When viewing in terms of these long-term cycles, we are in the midst of high stock market return cycle. Of course, there may be a business cycle recession or financial market shock within these long-term bull runs, but the cycle will continue until we reach the end and experience another lost decade. Take a look at the table below. It shows annualized stock returns for different cycles starting in the late 1800s. Over the past 130 years or so, there exists a boom then a lost period. I define a lost period where US stock prices did not go up over an extended period of time.

Table 1: S&P 500 Stock Return Cycles

Period Annualized Return # of Years Cycle Type
1872-1897 -0.33% 26 years Lost
1898-1929 6.07% 32 years Bull
1930-1952 -0.80% 23 years Lost
1953-1968 15.06% 16 years Bull
1969-1979 0.11% 11 years Lost
1980-2000 13.31% 21 years Bull
2001-2012 -0.36% 12 years Lost
2013-2018 10.69% 6 years Bull

I calculate cycles based on stock market peaks. For example, the stock market peaked towards the end of 2000. The year the S&P 500 hit its 2000 peak and continued higher and higher was during 2012. Therefore, the lost period return is determined for the period from the end of 2000 to the end of 2012. Then the next cycle starts at the beginning of 2013. Post Bretton Woods, one can see that the lost periods are shorter. In most recent times, the lost periods only lasted 11 to 12 years as opposed to over 20 years lost. As of right now, we are 6 years into the bull market cycle. History has shown us that the bull market cycle can last 16 to 32 years in length. Since, we are only 6 years in, it means that we still have some time before the next lost decade is upon us. That does not mean there won’t be a recession or two in the meantime. During the 1980 to 2000 period, there were recessions in the early 1980s as well as the early 1990s. There was the Asian financial crisis as well as the LTCM crisis in the late 1990s. There was of course the 1987 market crash. However, in those periods, the US stock market fell but quickly rebounded and continued its direction upward.

With the advent of better technology, the modern financial world moves a lot faster than in previous periods. This could mean the duration of the cycles may change from previous cycles. The current bull cycle could possibly only last ten years instead of 32 years as in the early 1900s. Nevertheless, we are still not near the end of the current cycle. This means that investing in broad market US ETFs such as SPY, IVV, and VOO makes continued sense especially after the October rout.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.