What Does “End of the Bull Market” Mean?

Earlier in October, as you are probably aware, the stock market hit a rough patch.  The Dow declined almost 1,400 points during the two-day period of October 10-11.  I caught a segment on CNBC during that period and one of the guests opined that this is the “start of the end of the 10-Year bull market.”  What did he mean by that statement, and where would the indexes be if the bull market ends?

The End of The Bull

Bulls and Bears

The opposite of a bull market is a bear market.  We can only be in one or the other:  we are either in a bull market or a bear market.  We are currently still in a bull market.  A bear market is defined as a 20% (at least) drop from the previous high.  Thus, the current bull market will end when the indexes drop at least 20% from their highs.  

The S&P 500 Index reached 2,930 in late September 2018.  A 20% drop from that point would be to 2,344 or lower.  2,344 would put us back to about where we were at January 1, 2017, and would thereby erase all of the gains we have had since President Trump assumed office.  

Nasdaq

As for the Nasdaq 100 Index, the high was about 7,660 in late August 2018.  A 20% drop would be to at least 6,128, which is where the Nasdaq 100 Index was during the 2nd Quarter of 2017.  As I write this, we are currently about 7% below the August high, so we still have a good way to go before we hit the “bear market” definition.  While there are other indexes (the Dow Jones Industrial among them), these are the primary indexes that investors look at to define a bull or a bear market.

What Would Cause a Bear Market?

The market will drop 20% only if there is a reason to compel it to drop 20%.  There are several potential catalysts out there that could result in the 20% drop:

  • The Yield Curve could invert, meaning that short term rates yield more than long term rates.  While the Federal Reserve has been raising short term rates, long-term rates have been slower to go up, meaning the Yield Curve has tightened.  However, the October 10-11 sell-off was in part caused by higher long-term rates.  For instance, the 10-Year yield rose to about 3.2%, although it has since leveled off.  The rise in the 10-Year yield means there is less likelihood that the Yield Curve will invert.  Of course, things could change.
  • Our economy could dip into recession.  Most economists say, and I agree, that there is very little likelihood that we could dip into recession in the next 1-2 years.  GDP growth is robust and unemployment is low.  We have a labor shortage.  Most leading indicators are strong.  
  • An outside factor, such as China currency devaluation, trade wars that get out of control, or maybe even an armed conflict or other tragedy, could sink the market.  Of the possible causes of a bear market, I view this “Black Swan” concept as the most likely to occur.  

IMO

Doomsday predictions make for good TV especially on financial shows during days where the market is selling off.  Just because the market sells off for a couple of days doesn’t mean that the 10-year bull market is over and we are about to correct 20% into a bear market.  The best guess on where we are right now (as I write this) is that we are in a correction, which is different than a bear market, and that you should wait on making new purchases or adding to existing holdings until the correction sorts itself out.  Look at the correction we had during early February 2018:  We had a period of several weeks after that sell-off before the market regained its footing.  Wait at least for a couple of strong up-days before wading back in.  I don’t agree with the CNBC commentator that the end of the bull market is nigh.