Bull Markets Do Not Rise Forever

By David Schwartz 5- Oct -2005

History teaches the typical bull market rally runs for a much shorter period of time than is commonly assumed.

The UK stock market rallied strongly since the last bear market ended on March 12, 2003. Share rose, on average, by 73 per cent. Some sectors like mining and oil rose much further.

Unfortunately, conservative investors now have reason to worry that the current advance might soon end. There are no guarantees in the world of investing but history teaches the end of the bull market of 2003 - 2005 is in sight.

There were17 very big downturns in the world's mature stock markets during the twentieth century. They included Wall Street's painful drop in the early-1930s, London in the mid-1970s, Tokyo in the 1990s and 14 other serious declines.

These declines occurred in a variety of different economic and political conditions including the Great Depression in the early-1930s, recession and war in the late-1930s and inflation and oil shortages in the 1970s.

But regardless of underlying economic or political conditions, the aftermath of these 17 downturns were remarkably similar. Thirteen bounce-back rallies ended within 19 months. Three longer-running exceptions to the rule ended at the 30-month mark.

The single bounce-back rally that did not follow the rules occurred in the aftermath of the bear market of January 1937 to June 1940. Wartime conditions played an important role in causing this exception. The 1940s featured high corporate earnings, very high taxes, and government controls over all aspects of the British economy. Favourable battlefield news also affected shares. It helps to explain why shares steadily drifted upward until January 1947.

Putting aside the atypical conditions associated with wartime Britain, no bounce-back rally ran longer than 30 months after a big bear market ended.

This is an important point to think about because the UK's current bounce-back rally has been running for 31 months. Wall Street began to rally in mid-October 2002, a bit ahead of us. Their bounce-back rally is now 36 months old.

History signals it is very late in the day for the current rally, especially on Wall Street. No one knows exactly when the S&P 500 will peak. But if the past is any guide, shares are likely to soon peak. Given US stock market and economic dominance, London is unlikely to continue to rise once Wall Street begins to decline.