Reading the Tea Leaves: Long-Term Cycles

Mar 26, 2019 | Elaine Law


Understanding where we are within the long-term market cycle

As Portfolio Managers and Advisors, our team constantly reviews the changing economic and corporate fundamentals that affect our investments. At the same time, it is equally important to consider these fundamentals within the context of where we are in the cycle. This can be best understood by looking at long-term cycle charts.

The chart above shows a ninety year range. The S&P500 has been alternating between a bear market and a bull market, with each cycle lasting around 16-18 years. Bear markets (in orange) have been characterized by “heavy resistance”, large, choppy trading patterns, and “heavy support”. In other words, the markets are on a roller-coaster that is trapped in a horizontal range. Bull markets (in green) may also have periods of volatility but are characterized as having “higher highs and higher lows”; the ride is bumpy, but it is trending upwards.

Some investors believe that we are coming towards the end of the cycle, which should encourage a more cautious investment approach. These investors believe that the recent bull market started at the lows of 2009. On the other hand, some analysts disagree and point to long-term charts that suggests the bull market may have only started around 2015/2016. They would make the appeal that in 2009, the market was technically still trapped in the bear market range that started after the tech bubble burst. As the chart shows, the bull market technically started after the market rose above that 16-18 year horizontal range.

Investors may find it intriguing to note how consistent the 16-18 year bull & bear patterns have been. Through this chart, Investors can see history reveal itself within these bull and bear markets. The first bear market on the chart is highlighted by the Great Depression and the Second World War. By the early 1950’s, the bull market broke out of this range benefiting from the massive middle class expansion and baby boomers. This period is often referred to as the golden era of the American economy. From the 1970s to mid-1980s another bear market range was seen, stained by record trade deficits, an energy crisis, recessions, and sky high inflation. From the mid-to-late 1980s and throughout the 1990s, the bulls retook control, resulting from stimulative government policies and the emergence of technological advancements. This “Boom of the 90’s” ended after the dot-com bubble. This bring us to the most recent long term bear market, which is bookended by ‘Y2K & 9/11’ and the aftermath of the ‘sub-prime mortgage & financial crisis’.

Reviewing long-term market trends allows us to make current decisions with the benefit of the long-term perspective. Needless to say, within every bull market exists turbulent times:

1950’s-70’s (Suez Canal Crisis, Cuban Missile Crisis, JFK Assassination, Vietnam War)

1980’s-2000 (Black Monday, Junk Bond Collapse, Gulf War, Asia Crisis, Y2K)

Looking back at previous bull markets, it would have been tempting to give up on the stock market at any instance of ‘crisis’ or risk. Hindsight, however, allows us to know that investors would have missed out on the fruits of the longer-term bull market cycle that can last about 16-18 years. This current bull market is no different, as investors have also been unsettled by negative headlines (European Crisis, Oil Crisis, Debt Crisis, Trade War). Although we have experienced volatile market movements, the overall upward trend appears to be intact.

Keeping this long-term chart in your back pocket is essential for long-term investors, who are seeking to be less reactive and invest with a steady hand. Although this chart cannot shield investors from short-term market corrections or flash crashes, it does set the context that the longer term cycle is working in their favour.