What Will Happen After this Bull Market Ends?

As described here, I have projections suggesting that the bull market in U.S. stocks will last at least until the end of this year, with the latest target in mid-2018. But, what should we expect after that? It’s virtually impossible to say specifically, but I would expect a bear market taking the form of a downtrend or sideways period lasting at least 2 years, and it could quite possibly last around 5 years. The bear market would have a drop of at least 25% if historical precedent applies.

The definition of a “bear market” varies widely depending on who you are talking to. In my case, for my historical analysis, I consider a bear market to be a period in which the market has two or more downward moves separated by rallies that fail to make a substantial new high, and the whole pattern is not occurring as part of an obvious Elliott Wave bull market.

I should also note that I do not subscribe to the idea that all market history and human history fit into Elliott Wave patterns of infinitely large degree. I personally only use Elliott Wave in the context of individual bull and bear markets, and I treat them as stand-alone patterns. I don’t believe in grand supercycles. Furthermore, there are market periods that do not really conform to Elliott Wave patterns at all in my opinion.

Looking back over the past century, here are the periods that I consider to be “bear markets” on the Dow Jones Industrials Average:

1899-1921 (I am excluding this from the stats below given that for most of this period, there was no Federal Reserve)

1929-1932

1937-1942

1946-1949

1960-1962

1966-1982

2000-2009

So, we have an average bear market length of 6 years, and a median length of 5 years. In terms of nominal percentage drop, the mildest bear market was 1946-1949, which was a 25% drop. The most severe was 1929-1932, which had a drop of nearly 90%.

In nominal terms, the average and median bear market drops were 50%, using intraday values.

In inflation-adjusted terms, the average and median bear market drops were roughly 54%, using monthly closing prices.

For those statistics, if a bear market was a sideways period (like 1966-1982 nominal), I used the percentage drop of highest high to the lowest low during that period (for instance, 1973-1974).

All of those bear markets were, to some degree, associated with recessions.

Here are the nominal and inflation-adjusted historical Dow charts:

Nominal

djia full historychart from freestockcharts.com

Inflation-Adjusted

dow full history inflation adjustedchart from macrotrends.net

 

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Update (5/1/2016)

The market action last week definitely suggests that some sort of correction is underway in the U.S. stock market indices. I think that there is probably more downside to go given that, after the major lows of March 2009 and October 2011, the first significant drops on the major indices were roughly 5% and 10%, respectively. In the current situation, the Dow and S&P have only fallen 3% from their recent peak thus far.

As for how deep this correction will go, I don’t have an informed estimate, other than that I expect the Jan/Feb lows to hold on the Dow and S&P.

However, if the correction become severe, I would not be surprised to see the NASDAQ-100 (NDX) make a new low, given that it fell considerably short of its December high during the recent rally. Also, the NDX seems to be somewhat out of phase with the Dow and S&P 500 as I described here.

Considering the Middle Section count described in my previous post, it is possible that the markets could be bearish until June. However, I still expect that the stock market will make new highs during the 2nd half of this year.