Wall Street is NOT a One Way Street
“Stocks tend to fluctuate”, so said J.P. Morgan in one of history’s great understatements. One look at the History of the Stock Market in the 20th-21st Centuries (which follows) confirms this. The stock market goes up (a Bull Market) and down (a Bear Market), but beyond that, Wall Street, quite unbelievably, has no universally accepted definition of either, so here goes:
Charles Dow (of Dow-Jones The Wall Street Journal and The Dow Theory fame) defined it as “a broad upward movement” – I’d say O.K. but a little vague. Ned Davis Research defines it as “a 30% gain after 50 days, or a 13% rise after 155 days” – now I’d say that’s not too vague, but is a little too much. My own studies of the stock market in the 20th century show many fluctuations of 10 or 15% that don’t develop into anything, but when markets bounce up 19% that is the threshold from which advances have then risen 93% of the time to over +29%. One-half have risen over 80%, with the average Bull market gain being +111%, and lasting nearly 3 years (based on the record with the aberrations of the 1930’s removed). Therefore, I define a Bull market as one which advances 19% on both the Dow Jones Industrial Average and the Standard & Poor’s 500 over any timeframe. Economic expansion has followed each such occasion. Subscribers will find a full report plus graph in the Special Report: Bull Markets of the 20th-21st Centuries.
Bear Markets follow (and precede) Bull markets. The market has declined over 10% more than 50 times in the 20th and 21st centuries, yet that alone has not resulted in Bear markets. The threshold of -16% has resulted 70% of the time in declines occurring of at least -24% with the average loss for Bear markets being -33.5% over 16.5 months time. Therefore, I define a Bear market as one which declines 16% on both the Dow Jones and the S.& P. 500 over any time-frame. This definition is followed 70% of the time by recessions. It happens that a 16% decline is the reciprocal of a 19% advance, and vice versa. A market decline from 34,000 to 28,560 (-16%) would be a Bear market, and conversely a market advance from 28,560 to 34,000 (+19%) would be defined as a Bull market. Subscribers will find a full report plus graph in the Special Report: Bear Markets of the 20th-21st Centuries.
How does it matter? Usually Bull markets occur for 67% of the time and Bear markets exist for some 33% of the time. When Bear markets come (and they always do) they have been followed 70% of the time by recessions. (see “The Stock Market as a Business Cycle Predictor in the 20th-21st Centuries” which follows). Some Bear markets take years to regain their losses, for instance it took 25 years after 1929 to get back to those highs. After the market first hit 995 on the Dow Jones Average in 1966, it was still at that level 16 years later in 1982. And then came the 17 1/2 years from 1982 to the year 2000 with a 15 fold increase that had newer investors thinking it was always like that. The market ALWAYS does one of three things: it can go UP, DOWN, or SIDEWAYS. But it NEVER goes just one-way indefinitely!