By Tim Courtney, Chief Investment Officer
The current bull market1 is nearing a decade in length. In the 9 years since the Great Recession2 ended, markets have for the most part been fairly quiet. This period of quiet followed by some recent market volatility has created worry – or optimism for those betting against the market – that we must be approaching trouble soon.
The beginning of a bear market3 is widely defined as when the market declines 20 percent from its peak. By this definition, we haven’t had a bear market since the 2009 recession. That’s a long time for a bull market to sustain itself.
However, if we were to change the definition of a bear market, we would be in a slightly different world today. Following the Great Recession, we’ve had multiple market contractions between 5 and 15 percent4. We just haven’t reached the 20 percent that defines a bear market.
In 2011 for example, from April 29 through October 3, the market experienced a 19.37 percent pullback5. If the market had continued downward for just one more day, we would be saying it’s been six-and-a-half years since the last bear market.
Similarly, a recession is defined by the National Bureau of Economic Research as two quarters of contraction across the economy6. The Bureau decides when recessions start and end based on this broad definition and other criteria. While the U.S. technically hasn’t been in recession since 2009, the period between 2014 and 2016 saw most global economies7 – as well as most sectors of the American economy, such as energy8, small businesses9 and financials10 – fall into a defacto recession. Only a few large-cap companies were keeping the economy out of the official definition of “recession.”
Once again, these definitions, which are partially arbitrary in nature, keep us from considering this period a recession, and this makes it seem as if we’ve been in growth mode for about 10 years. If we were to take the global economy into account, or several U.S. sector struggles over this time, we would see many areas of the economy are actually only two years into an expansion.
Are we in the late innings of an expansion, or are many sectors just beginning to see growth after years of weakness? Because the definitions of economic expansions and market performance are drawn so broadly, it is hard to tell. That is why we generally resist making near-term investment calls based on these measures. Some investors who in 2015 thought the market was too long in the tooth and avoided stocks have missed two solid years of growth and the future compounding of that growth.
As noted earlier, we should expect more volatility in 2018 as prices are higher. However, we still expect to be compensated for taking on that volatility in the form of higher expected returns. That is especially true in areas like small companies and international companies that appear to be just two years into an expansion.