The Life Cycle of a Bull Market

While this is largely semantics, it’s recently been said that we’re “officially” in a new bull market now that it is up 20% from the October lows. Admittedly, I don’t remember this announcement being made following previous bear markets, but since it has, I thought it might be helpful to review the life cycle of a bull market and see if we can identify where we stand today. To do so, we’ll use the famous quote from Sir John Templeton:

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

Let’s briefly explore each stage individually.

Pessimism is often defined by sheer hopelessness. This is the assumed belief that things can only get worse. The irony, of course, is that it’s during the depths of pessimism that a glimmer of hope begins to appear, which serves as the very beginning of a bull market.

Next is the skepticism phase. This phase begins once the market has come off its bear market bottom, but few believe that the worst is officially over.

Skepticism might be characterized by investors asking whether they should take some chips off the table since the market has rebounded from the bottom. The obvious assumption here is that the market is destined to go south again, which helps explain why the markets are often so jittery during this stage of the market.

Once skepticism passes comes optimism. This is the belief that things will continue to get better. Temporary pullbacks don’t tend to worry investors too much because they believe the future is bright. And they are generally correct.

The problem is that this feeling of optimism eventually morphs into full-blown euphoria, which is the final stage of most bull markets. This is the belief that no price is too high and that making money is easy. Remember tech stocks in the late ‘90s, real estate in the mid-2000s, and cryptocurrencies in 2021? It’s all fun and games until it isn’t, and then it’s too late.

So, based on these four stages, where do you think we stand today? I tend to believe we’re somewhere in the skepticism stage.^[1] Let me explain why.

Since broad pessimism seems to be behind us now, skepticism is the next obvious choice for a couple of reasons. First, there’s the general doubt about why the market has rebounded the way it has from the October lows. Carville’s famous quip, “It’s the economy, stupid.”^[2] doesn’t seem to offer much satisfaction despite the probable truth of the matter.

Secondly, it seems that investors are more afraid of staying invested or putting more money to work than they are of missing out on future potential gains. That’s skepticism.

To be clear and emphatic, this doesn’t mean that stocks are necessarily underpriced or that we’re on the cusp of a big market move. I’m also not saying that the worst is behind us. Obviously, I’m not predicting anything since you know my opinion of forecasts…

All I’m saying is that investors still seem to be keeping their eyes on the exits, which suggests we may have some room to run. I guess we’ll see.

As you can probably tell, I’m just thinking out loud here because, in the long run, I don’t think “where we stand today” matters all that much outside of sheer curiosity. To paraphrase Howard Marks in his latest memo,

“We’re not trying to get in and out of the market, we’re merely participating in their long-term trends, and those have been very favorable.”

With that being my true north, I’ll simply encourage you to stay the course so we can potentially continue participating in these powerful long-term trends. Even though past performance doesn’t guarantee future results, I believe we’ll do quite well if we can just keep our eyes on the prize.

Please be encouraged to reach out with questions and concerns. I’m happy to talk any time!

^[1] You could make the argument that A.I. and tech stocks are somewhere between optimism and euphoria.
^[2] I’m using this quote in a positive way as the general economy has been remarkably resilient throughout this decline.

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