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Cyclical Bull Markets In Secular Bear Markets

Written by Lance Roberts | Jan, 16, 2013


John Hussman, manager of the Hussman Funds, had some very good data from Nautilus Capital regarding the average duration of cyclical bull markets within secular bear markets.   As we have stated in the past, we are continuing to mired in a secular bear market most likely for the next decade as valuations correct and excess leverage is removed from the system.    If we are correct the current cyclical bull market may be nearing its end.

You might expect that when the market is gradually working down from a high level of overvaluation, bull markets would tend to be shortened, and bear markets would tend to be deeper. In fact, that’s exactly what we observe. As the guys at Nautilus Capital note, cyclical bull markets within secular bears have tended to average just 26 months, with an average gain of 85%, while cyclical bears within secular bears have averaged 19 months, with steep average losses of -39%. So market cycles tend to be truncated during secular bears, averaging a full bull-bear duration of just 3.75 years, for a full-cycle average gain of just over 12% (3.3% annualized). Of course, fundamentals still tend to grow faster than 3.3% over the cycle, resulting in valuations that are lower at each bear market trough, even if prices are higher in absolute terms. I recognize that outcomes like these are unpleasant and inconvenient to contemplate, but denying the possibility doesn’t make anyone a better investor.

The important thing to take away from this chart is the devastation that occurs during the decline.   Most investors, because of human emotion look at the gains during the bull markets, this is greed.   However, what is important to focus on are the declines that occur during the bear market cycles which take away a large chunk of the overall gains.    Example:   If an investment of $100 increases by 10% you have $110.    If that investment then declines 10% you are left with only $99.    The math here is very important.   Most investors do not have the time to recover from the losses incurred during the bear market cycles.   

This is not a timing vehicle by any measure but it is important to realize that all market cycles do come to and end – both bull and bear.   While the mainstream media keeps spouting that the current markets are in great shape and you should be fully invested; the reality is that there is an ever increasing level of risk to your retirement funds.

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