The biggest bounce in this bull market is behind us.
That is the conclusion that I have drawn when analyzing all of the US bull markets since 1900. The good news is, assuming the future is the same as in the past, the current bull market is still months away. again. The bad news is that stock market gains during those months are likely to be much more modest than we have been used to over the past 12 months.
This suggests that we should not extrapolate the past 12 months’ returns for the future.
My analysis has problems with analysts who think the strength of the stock market over the past 12 months has been a bullish foreshadow. In fact, there’s nothing particularly unusual about how strong the market is at launch on March 23, 2020, at the low end.
That seems unbelievable, given the Dow Jones Industrial Average
has risen a staggering 74.4% in the 12 months from that low. But in fact, there are three other bull markets since 1900 on the calendar maintained by Ned Davis Research, of which the Dow rose even more in the 12 months after its inception. The bull market that started after the Great Financial Depression was not one of those three, but it came close: In the 12 months after March 9, 2009, for example, at a low level, DJIA rose 61.4%.
The general pattern is that bull markets are usually at their strongest soon after they are born: On average more than half of all bull market increases are produced during their first 12 months. Consider the average bull market in the Ned Davis calendar. Not counting now, there have been 37 people since 1900. Of those, nine – or 24% – have failed to reach their first birthday. The remaining 28 live to be 2.7 years old and during that time, the DJIA has achieved a total of 93.9%. Hence, if the current bull market is “average”, it will continue until November next year – but only making modest gains from now until then.
Furthermore, the market outlook may actually decline further due to its strength in the first 12 months of the year. That’s because there is a weak inverse correlation between the return of a bull market in the first 12 months and how strong it follows: the direction does not last long or rise as far as those bull markets take off more slowly. (Note, however, that this correlation is statistically weak, so you shouldn’t be doing too much.)
What stock market returns should you expect in the future?
So what will future equity returns look like, should retirees and upcoming retirees assume when developing their financial plans?
The efficient market (EMH) hypothesis tells us that the expected return of the stock market at any given moment is independent of what happened up to that point. This is because the stock market is a futuristic, discounting mechanism. So its future profit will be a function of whether the future gets better or worse than what is currently foreseen – not by how the market is active until the present moment. .
The stock market has generated inflation-adjusted gross returns of 6.0% annually since 1793, according to study conducted by Edward McQuarrie, an emeritus professor at Leavey School of Business at Santa Clara University. So if you don’t know where we are in the stock market cycle and assume that the future is like the past, it’s the expected return that will be in your financial plan.
Of course, you may not be EMH compliant. Or you may worry that, since the stock market is currently overvalued by any measure, its expected future return will be below the average. I share that worry, as I wrote in recent column.
But even if you don’t lower your expected return assumptions because of fear of overvalued, keep in mind that the expected equity return that you should include in your financial plan goes up to 6. , 0% annually on a basis for adjustment for inflation and dividends. This is still low compared to what the stock market has generated over the past 12 months.
Trees do not grow into the sky, as John Maynard Keynes wrote a century ago. We forget that our dangers.