9 February 2021Asset management analysis

Playing the odds: Bull vs Bear markets

One of the biggest fears that captives owners have, as well as just about every other investor, is what happens to the value of their investments if we head into a Bear market?

A Bear market is “called” when stock indices (or even individual stocks) decline 20 percent or more from the previous peak. The most recent Bear market occurred less than a year ago, in March 2020. Many think there was also a Bear market in Q4 of 2018, but in that period the market declined about 19.8 percent, so it did not technically qualify as a Bear market, despite certainly feeling like one.

“Being a Bull does seem to come with financial gains and rewards.”

Conversely, a Bull market is when stocks appreciate by more than 20 percent off a recent low. The most recent Bull market began in April 2020, and the prior Bull market was one of the longest ever in duration, lasting from the lows of March 2009 until March 2020 when it was killed by COVID-19 and the roughly 33 percent decline in the S&P 500 that followed.

Figure 1 shows a history of Bull and Bear markets going back to 1942. The blue sections are Bull markets and the duration, total return and annualised returns are listed over each section. The yellow sections below the line are Bear markets with the same statistics.

Figure 1: History of US Bear & Bull markets since 1942

Source: First Trust

One doesn’t need to be a technical analyst to see that the Bear markets were shorter—and shallower—than the Bull markets. This makes sense. At the end of the day the prices of stocks are guided—or pushed—by the value and growth of their revenues and earnings. Revenues and earnings are in nominal dollars, and each year the value of a dollar declines by the amount of inflation, defined as increasing prices of goods and services.

For this reason it is almost impossible for a company with even flat unit sales to not show growth in revenue and in earnings, if they are properly run businesses, simply due to inflation.

The chart shows that the average Bull market lasted 52.8 months and returned 152.6 percent, while Bear markets lasted only 11.3 months on average and had a loss of 32.1 percent. Since 1942, or in 936 months of data, 784 months occurred in Bull markets and only 153 in Bear markets. That means that only 16 percent of the time were the markets in Bear territory; 84 percent of the time they were in a Bull run.

Even more interesting is that Bear markets in the last 20 years have lasted an average of only six months; the last two Bear markets lasted for two months and one month, respectively. My theory is that better and faster dissemination of market information, artificial intelligence and algorithms all kick in to start buying after the Bear shows up, usually caused by the very same forces.

Does this mean it pays to be a Bull? The data bears out (no pun intended) that being a Bull does seem to come with financial gains and rewards. Investors clearly have a better chance of winning, not only on a time basis but also on a return basis. Bull runs return on average almost five times the gains versus the amount the markets lose during a Bear market.

John Stoltzfus, chief investment strategist at our affiliate Oppenheimer Asset Management, always says “know what you own and why you own it”. I couldn’t agree more, but given all we have discussed here, I’ll play the odds and be a Bull.

Jack Meskunas is executive director for investments and a captive insurance asset management advisor in the institutional investment group at Oppenheimer & Co. He can be contacted at: