What are Market Cycles and Why Do They Matter?

10/07/2019 - Uncategorized
Stock Market Cycles

Do you like roller coasters? Whether the thought of climbing steep inclines only to plummet to new depths is thrilling or terrifying to you, I can tell you one thing: the average investor certainly doesn’t like those death-defying drops when it comes to the market. Just ask anyone who worked in the markets—or had money in them—during the global financial crisis of 2008, the tech bubble burst of 2000, or the “Black Monday” crash of 1987.

I can still hear those coaster-induced screams, not because the events themselves were particularly devastating—they weren’t (at least not for those of us who stayed in the markets and owned companies that were fundamentally sound)—but because they caused such hysteria. During those years, clients called me panicking on a daily basis. It was hard not to buy into their alarm, but I kept faith that we would ratchet our way back up.

Why? I understood market cycles. What is a market cycle, exactly? A period measured not by dates, but by market conditions. A cycle is considered complete, or “full,” when the market in question has gone from bull—a market in which prices are expected to rise—to bear, when those prices fall due to widespread investor pessimism, and back again to bull.

Although past performance is no guarantee of future results, I believe studying the history of the stock markets’ uptrends and declines can help one to better understand why staying invested for the long term can be beneficial.

Since the inception of the S&P 500 Index back in 1926, the market has gone through cycles, with average bull markets lasting 9.1 years and producing an average cumulative return of 476 percent, and bear markets averaging 1.4 years with loses totaling around 41 percent. [1] Yet with all these expansions and contractions, today we stand with a stock market valuation higher than it was when it started.

We may be on a roller coaster, but that roller coaster is on a mountain. There may be peaks and valleys along the way, but ultimately—at least to date—we’re still heading up.

Of course, successful investing requires an awareness of those peaks and valleys and careful analysis of opportunities. That is exactly what I do—and have done—every day of my working life, since 1985.

 


[1] Source: First Trust Advisors L.P, Morningstar. Returns from 1926-6/29/18. The S&P 500 index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. These returns were the result of certain market factors and events, which may not be repeated in the future. Past performance is no guarantee of future results.

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