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Bull Market Is Not Strong Based On Historical Standards

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by: Michael Harris
Michael Harris
Research analyst, ETF investing, momentum, medium-term horizon
Summary

All-time highs and bull market strength should not be conflated.

5-year stock market returns are close to average.

10-year stock market returns are far from extraordinary.

In this article I answer the following questions: what is an extraordinary return for the stock market? Was 2019 an extraordinary year?

I consider S&P 500 (SPY) return as representative of the market, although that may not be for certain portfolios.

Below is a chart that shows histograms of 1-, 5-, and 10-year returns for the index since 1960 along with useful statistics: number of positive and negative returns, mean, standard deviation and two standard deviations from the mean.

In my opinion, histograms are better for plotting returns than, for example, frequency distributions, which are often confusing, especially for readers that are not familiar with statistics. We are not here to impress with fancy graphs, but to understand in the simplest possible way what is going on.

Note that, when referring to mean and standard deviations, that concerns only the available sample, and not the population or returns for which these statistics may not be available, due to limited samples and unknown distribution.

1-year returns

No positive year ever gained more than two standard deviations above the mean, but there are two years with losses below minus two standard deviations. Last year was up 28.9%, versus 40.5% for the two standard deviations band.

5-year returns

The 5-year return at the end of 2019 was at about 57% and above the mean at about 46%, but far below the two standard deviations band at about 145%. Only in the '90s did we have two occurrences of 5-year returns above two standard deviations.

10-year returns

The 10-year return at the end of 2019 was at 190%, a little less than double the average 10-year return at 110%, but two standard deviations from the mean is at 300%, or close to three times the mean. Four occurrences in the '90s came close or exceeded the two standard deviations band.

Below is a table that summarizes the above results. We consider extraordinary return anything above two standard deviations of the available sample.

S&P returns 2019 return Extraordinary return
1-year 28.9% 40%
5-year 57% 144%
10-year 190% 300%

Summary

Despite all-time highs, the current bull market in stocks is not as strong as past bull markets and especially the '90s bull market. All-time highs and bull market strength are usually conflated, especially by a few economists and other non-quant types, but analysis shows that this is not always the case. For example, the Dow Jones Industrial Average should have been around 30,000 three years ago, had it grown at the same rate as before the 2000 top.

Original article

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. I have no business relationship with any company whose stock is mentioned in this article.