A few months ago, we shared Goldman Sachs’ Chief Global Equity Strategist Peter Oppenheimer’s understanding of the market cycle and its four recurring phases:
Understanding the cyclical nature of the equity market can help investors make rational decisions – and stay calm – even when the economy is volatile. Which is helpful intel as you’ve probably noticed that the markets have been on quite a ride lately.
Good news: Historically, markets have bounced back. And recently, Oppenheimer and his research team dove into the history of how the despair of bear markets tends to transition into the hope of early-stage bull markets and what they’re expecting this time around. (Here is the original version of their article on bear markets.)
Here’s some dinner party trivia: Not all bear markets are the same. Depending on what triggers a bear market, they can be severe or mild, long or short, and the recovery can be quick or gradual.
Our collegues think that the current bear market appears to be cyclical, that is, driven by factors like rising interest rates, profit declines and recession chatter. This type of market historically lasts two years on average and takes about five years to fully rebound to its starting point. The two other types of bear markets are:
1) Structural, bear markets that stem from financial bubbles or structural imbalances.
2) Event-driven bear markets which are triggered by a one-off shock. Think: the 2020 slump from the pandemic.
Most bear markets, regardless of type, tend to end with a similar powerful initial rebound – a bang – that our colleagues describe as the hope phase of the market cycle.
Unfortunately, it can be hard to tell the difference between a temporary bear market rally and a genuine transition into hope while they are happening. They may both look like a bull, sound like a bull and feel like a bull…at least at first.
One key sign we’re approaching a market recovery? Low company valuations. Alone, they aren’t enough to tell us the tides are definitely turning, but they are a critical factor. Other signs include a slowdown in bad news and/or a peak in inflation and interest rates.
Our Goldman Sachs Research colleagues have also developed two proprietary indicators to help pin down the turning point from bear to bull.
When our Bull/Bear Market indicator and Risk Appetite indicator are both close to their limits, it’s a strong sign that we’ve gone as far in one direction as we’re likely to go and change is imminent. But current levels of these indicators suggest we haven’t reached a turning point yet.
So what happens next? Something has to give. Either returns stay low and volatile for a long time or the market plunges further from its current lows to set a new, genuine bottom from which to rise.
If not all bears are grizzlies, not all bulls are Bushwacker. Bull markets can also vary in length and strength, depending on what’s going on with the economy.
Our colleagues expect the next bull market cycle to be fatter and flatter than the previous one. A fat and flat market means one that fluctuates up and down over a relatively wide price range. (One that fluctuates over a narrower range is known as skinny and flat.)
The last bull market (1982-2022) offered high real (adjusted for inflation) returns powered by rising company valuations. It was driven by:
The next bull market is likely to look a lot different, as some of these drivers reverse course. Our research team expects the next hope cycle to be focused on:
So even if this market feels a little uncomfortable, history suggests we sit tight and keep the worrying to a minimum because no part of the cycle lasts forever – it’s likely that bears will eventually sleep and bulls will run once more.
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