Bull market defined:
20 percent growth from lows? 
Or just good feelings?

One of my favorite movies ever, The Princess Bride, features Vincini, a diminutive, lisping Sicilian hitman with a habit of using the word “inconceivable.” He uses it so much that his Spanish swordsman, Inigo Montoya finally challenges him: “You keep using that word. I do not think it means what you think it means.”

So it goes with financial journalism. If you follow financial media – my deepest sympathies if you do – you might have noticed words like bull, bear, recession, yield curve, net returns, index, etc. used so much you would think their definitions were self-evident.

Last week, Kevin Matras, Executive Vice President of Zacks Investment Research, published an article with the following lead paragraphs:

“Stocks closed higher yesterday with the big 3 indexes in the green. And the S&P 500 finally caught up to the rest of the indexes and officially exited their bear market. They needed a close at or above 4,292.44, and they gained 0.62% to close at 4,293.93. From their bear market low close to yesterday's close, they are now up 20.04%. And crossing that 20% threshold means their bear market has ended and a new bull market has begun.

“The small-cap Russell 2000 was the first one to exit their bear market back in August of last year. Then the Dow followed suit in late November of last year. The mid-cap S&P 400 exited their bear market in late January this year. The Nasdaq ended their bear market and started a new bull just last month. And the S&P 500 joined the party just yesterday.”

The first paragraph highlights the mathematical definition of a Bull Market and how it is similar to its archnemesis, the Bear Market. A stock or index can achieve “Bull” status by rising more than 20% from its previous low. A Bear Market is a 20% drop from the previous high. Simple.

Except…

On the website, The Balance, a 2021 piece by Kimberly Amadeo provides a definition that is much less clear:

“A bull market is the condition of a broad market or a single market in which prices are continuously rising.”

She follows this up with some examples:

“These were the five longest bull markets since World War II:

1949 to 1956 (86 months)
1974 to 1980 (74 months)
1982 to 1987 (60 months)
1990 to 2000 (113 months)
2009 to 2020 (131 months)1

The most recent bull market is the longest in history. It went from 6,594.44 in 2009, to a high of 29,551.42 on February 12, 2020, returning 348%.”

This definition, rather than establishing a clear mathematical rule, relies on post-facto, time-based analysis. This could be seen as a corollary to the definition of a Recession: two consecutive quarters of declining Gross Domestic Product (GDP).

Now let’s turn to ChatGPT, which kindly took time away from killing all humans to answer my query about what defines a bull market. It identified four qualities that make a bull market: 1) Rising asset prices, 2) Positive investor outlook, 3) Low volatility, 4) Economic expansion.

Based on these qualities, one could debate whether or not the Zacks article labeling our current market conditions as “Bull” are truly on point. Fortunately, three of the four metrics provided by ChatGPT are data-driven. As such they can be looked up and confirmed.

For volatility, we can look at the VIX index. The VIX is brought to us by the Chicago Board Options Exchange (CBOE). Options give investors the right to either buy (call) or sell (put) a stock in the future. In plain English, options traders make bets about whether markets are headed in a positive or negative direction. The VIX, then, measures how much volatility these investors expect over the next month.

So what does the VIX say right now? VIX has been trending downward since September 2022, and currently sits at its lowest level since the halcyon pre-pandemic days of December 2019, at a price of 13.83 (Dec 1, 2019 was 13.78).

If you look at the chart below, in fact, it appears that the current level of volatility is lower than it was from 2012-2015, during the heart of the post-Financial Crisis bull run and the 0% interest-rate-a-palooza.

So, broad market indexes are gaining in price and a key volatility measure has fallen to previous levels of healthiness. That’s two of four ChatGPT checkmarks checked.

The third is Economic Expansion. Another statistical measure. Hooray! For this, we can turn to the Bureau of Economic Analysis, which calculates United States GDP. The US GDP grew for the third straight quarter. However, not all signs paint a rosy picture.

GDP contracted for the second consecutive quarter. While GDP grew 1.3% in Q1 of 2023, Q4 of 2022 saw a growth rate of 2.6%, and Q3 2022 saw growth of around 3%. This accompanies a decrease in corporate profits of 5.1%, compared to a decrease of 2% in Q4 2022. Finally, real gross domestic income, which measures the difference between American incomes and the costs to generate Gross Domestic Product, fell by 3.3%, more than double the previous estimate.

It appears fair to say Economic Expansion is somewhat of a mixed bag at present. And we still have a pesky final quality to consider – Investor Outlook. How can we measure something like opinions about the future?

VIX is perception index – it measures an expectations of a near term future, not present reality. As such, it can be used to gauge investor sentiment. Sentiment about what? It turns out, the VIX measures volatility in one specific index: the S&P 500. The S&P 500 represents a weighted average of the 500 largest companies in America.

As of May 4, 2023 the Top 10 holdings in the S&P 500 represented 30.33% of the value of the entire index. Those holdings are, in order, Apple, Microsoft, Amazon, Nivida, Google (twice because it offers both voting and non-voting shares), Meta, Berkshire Hathaway, Tesla, and United Health Group. 8 Tech or Mostly Tech companies, Berkshire Hathaway, and United Health. That is not a diverse mix representative of the entire US economy.

This means that nearly 1/3 of the VIX index is really measuring the sentiment around 9 companies, as is the metric gauging the rise of the S&P 500 relative to its previous low.

What can we mere mortals make of this crazy mix of ingredients? Bull market? Yay or nay?

My opinion is that rather than looking at Bull and Bear markets as a binary measurement, like a light that flashes on or off, they should be thought of the way we measure weather. Any weather app these doesn’t tell you yes, it will rain, or no, it will not. It shows you a percent chance of rain or sun.

As I write this, storms are threatening. The radar on my weather app shows trouble ahead. But the data points to only a 70% chance of rain at my location. This is the mathematics of probability. It can appear maddeningly noncommittal. But, underlying the numbers is a very honest acknowledgement that not all data has been accounted for, and there’s no way to know how unknown datasets may interact with other unknown datasets. The human population has crossed 8 billion, and not one of them knows everything, or can predict the future.

In this light, if you are already a risk tolerant person, you have reason to suspect that we are entering a new period of growth. If you are more risk averse, you have reason to suspect that the economy may get worse before it gets better. The data appears to support both positions.

So what do we do? How do you navigate the mapless landscape of the future? In any dilemma, a good first step is taking stock of what you have, what it can do, and how to use it. A course of action will be worthless if it isn’t supported by the resources you have available to pursue it.

Knowing how your accounts work, what they are for, what they can hold, and when to use them is an excellent first step that people often overlook. To this point, start with taxes. How and when is an account taxed? Are there penalties I can incur if I take out a withdrawal? This may be the single best use of the early stages of an advisor relationship: taking stock of what you have and how it works within the tax code.

We love to help people learn more about their finances and create personal, resilient, tax-aware plans to enhance the parts of life they value the most. If you are unsure how to prepare for whatever chance of bull market weather we may be entering, we would love to meet you. Click here to schedule a call..