Inflation-Adjusted Bull & Bear Markets Since 1871

Posted by Bigtrends on April 18, 2012 7:52 PM


Secular Bull and Bear Markets

Was the March 2009 low the end of a secular bear market and the beginning of a secular bull?  Without a crystal ball, we simply don't know. 

One thing we can do is examine the past to broaden our understanding of the range of possibilities.  An obvious feature of this inflation-adjusted is the pattern of long-term alternations between up-and down-trends.  Market historians call these "secular" bull and bear markets from the Latin word saeculum" long period of time" (in contrast to aeternus "eternal" - the type of bull market we fantasize about).


Long Term Chart

If we study the data underlying the chart, we can extract a number of interesting facts about these secular patterns:

Data Table

The annualized rate of growth from 1871 through the end of February (the most recent inflation data) is 2.01%.  If that seems incredibly low, remember that the chart shows "real" price growth, excluding inflation and dividends.  If we factor in the dividend yield, we get an annualized return of 6.66%.  Yes, dividends make a difference.

Unfortunately that has been less true during the past three decades than in earlier times.  When we let Excel draw a regression through the data, the slope is an even lower annualized rate of 1.72% (see the regression section below for further explanation).

If we added in the value lost from inflation, the "nominal" annualized return comes to 8.88% - the number commonly reported in the popular press.  But for a more accurate view of the purchasing power of the market dollars, we'll stick to "real" numbers.

Since that first trough in 1877 to the March 2009 low:

* Secular bull gains totaled 2075% for an average of 415%.
* Secular bear losses totaled -329% for an average of -65%.
* Secular bull years total 80 versus 52 for the bears, a 60:40 ratio.

This last bullet probably comes as a surprise to many people.  The finance industry and media have conditioned us to view every dip as a buying opportunity.  If we realize that bear markets have accounted for about 40% of the highlighted time frame, we can better understand the two massive selloffs of the 21st century.

Based on the real S&P Composite monthly averages of daily closes, the S&P is 61% above the 2009 low, which is still 33% below the 2000 high.

Add a Regression Trend Line

Let's review the same chart, this time with a regression trend line through the data.

Regression Chart

This line essentially divides the monthly values so that the total distance of the data points above the line equals the total distance below.  Remember that 2.01% annualized rate of growth since 1871?  The slope of this line, an annualized rate of 1.72%, approximates that number.  The difference is the current above-trend market value.

This chart below creates a channel for the S&P Composite.  The two dotted lines have the same slope as the regression, as calculated in Excel, with the top of the channel based on the peak of the Tech Bubble and the low is based on the 1932 trough.

Regression Channel Chart

Historically, regression to trend often means overshooting to the other side.  The latest monthly average of daily closes is 47% above trend after having fallen only 10% below trend in March of 2009.  Previous bottoms were considerably further below trend.

Will the March 2009 bottom be different?  Only time will tell.  Meanwhile, market participation based on trend-following, such as monthly moving averages, has been an effective strategy.

A little about the S&P Composite used in this article to compare 1871 market data with now -- The composite index is just that, a composition that splices the S&P 500, which started in March 1957, with historical data that included the companies in the S&P 90, founded in 1926, the S&P 233 weekly index dating from 1923, and earlier market data painstakingly gathered by Alfred Cowles.  The S&P Composite has been popularized by Yale Professor Robert Shiller, and an Excel copy of the data, updated monthly, is maintained at his Yale website.

Courtesy of Doug Short,