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Institutional Perspectives

Still No Sign of Euphoria in Current Bull Rally

March 2017

Key Takeaways
  • The current bull rally may be long in the tooth, but it lacks the euphoria typically observed at the end of extended bull markets.
  • The current rally has generated lower total and annualized returns relative to several previous long rallies.
  • There is no clear pattern in the duration and severity of bear declines following long bull rallies.

Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” – Sir John Templeton

Equity indexes are at historic highs,1 and many investors, commentators and media outlets are trying to figure out when this rally will end. We don’t believe it is possible to predict the timing of market cycles with any reasonable degree of accuracy and consistency. Consequently, we don’t indulge in this exercise, and our portfolios are not optimized for market-timing either. Instead, we are students and observers of the market. We find it instructive to study full market cycles because such analyses help us challenge existing market narratives with a richer context of possibilities. To that end, this piece attempts to characterize the current rally in terms of duration and stage of maturity. We have found that while the current bull rally is certainly long in the tooth, it still lacks the euphoria typically observed at the end of extended bull markets.

Exhibit 1 shows all bull market rallies for the S&P 500 Index since 1940.2 A bull market is defined as a 20% or larger cumulative rally following a 20% or worse cumulative correction. The S&P 500 has not experienced a 20% correction since March 9, 2009, based on end-of-day levels. And on December 14, 2016, the current bull rally officially became the longest in the 90-year history of the index, outpacing the 2,836-day rally of 1990-1998. Through February 28, 2017, the current rally is 2,913 days long (7.98 years).


Exhibit 1: S&P 500 Bull Market Rallies (1940 to 2017)

Source: Bloomberg Finance, L.P., ClearBridge Investments.



Although its duration is unprecedented, the current rally’s performance is not quite as impressive relative to previous rallies. From March 2009 to February 2017, the index is up 249% in price-only terms and 314% in total return (assuming all dividends are reinvested). Compared to the next three longest rallies, the current one is performing ahead of the 1974-1980 rally (126% price change and 204% total return), but trailing the performances of the 1949-1956 (267% price change, 489% total return) and 1990-1998 (302% price change, 390% total return) rallies.

The current rally appears even less impressive relative to prior rallies if we normalize the data to annualized total return for any rallies that lasted more than one year. While the current rally’s 19.5% annualized return over nearly eight years is impressive in its potential to compound wealth for the investing public, it is still the second-shallowest bull market since 1927 based on annualized returns. For instance, annualized total return for the next three longest rallies ranged from 19.8% to 28.1%.


Exhibit 2: S&P 500 Index Longest-Duration Bull Markets (1928-2017)

Analysis shows the nine rallies that lasted more than 1,000 days. Each rally is indexed to 100 at the start. Sources: Bloomberg Finance, L.P., ClearBridge Investments.


It is also interesting to observe that a number of rallies tended to accelerate toward the end of their cycles. For instance, the red line at the bottom of Exhibit 2 represents the trajectory of the 1974-1980 rally, which seems to accelerate around day 2,000. Not all rallies seem to follow this pattern. For instance, the orange line in the middle of the chart represents the 2002-2007 rally, which moved higher steadily without any meaningful acceleration. Or look at the dark blue line representing the 1949-1956 rally, which seems to accelerate around day 1,600 but has three sizable corrections as it matures.

These periods of acceleration into the tail end of a rally are analogous to the euphoria described by Sir John Templeton in the quote cited at the start of this paper. To analyze this further, we put a 10% parameter around these intermediate corrections. In other words, we identified periods of euphoria where a rally accelerates into its end without experiencing a correction of 10% or worse.

This approach identified five rallies – shown in Exhibit 3 – that accelerated toward their final months. As the figure shows, the euphoric phase of the current rally started off spectacularly for the first 50 days or so, but has been rather lackluster since then. As of February 2017, the current rally’s euphoria phase is 383 days old and the index is up 29% over this period. In comparison, previous rallies’ euphoria phases ranged from 246 to 413 days in duration and 35% to 46% in cumulative price appreciation. In other words, the current rally’s euphoria phase could produce another 10% to 20% return over the next month or so and it would still be within the historical range of duration and performance.


Exhibit 3: Periods of Euphoria in Select Bull Market Rallies (1928-2017)

Periods of euphoria are defined as a sustained acceleration in performance without any 10%-plus corrections. Each rally is indexed to 100 at start of euphoric phase. Sources: Bloomberg Finance, L.P., ClearBridge Investments.


What does all this mean? On the one hand, the current rally is the longest it has ever been, which could lead to the inference that it is due for a major correction. At the same time, it hasn’t really showcased the level of euphoria evident in several of the past bull rallies, which could lead to the belief that it has the potential to go meaningfully higher before the animal spirits driving it are exhausted.

As we discuss such “if so, so what?” questions, it is critical to guard against the temptation to apply statistical methods and principles (average or median length of rally or return, reversion to the mean, etc.) to this analysis because the sample size of the item of interest – bull market cycles in the United States – is very small.

As students interested in studying full market cycles, let us take the next step and explore what happens when bull rallies turn into bear markets. Exhibit 4 shows the bear declines that followed the bull rallies listed in Exhibit 1. A bear decline is defined as a 20% or worse cumulative correction following a 20% or higher cumulative rally.


Exhibit 4: S&P 500 Bull Market Rallies and Subsequent Bear Slumps (1940 to 2017)


Compared to Exhibit 1, Exhibit 4 shows different index levels for 10/11/90 and 8/31/98 because we used intraday index levels on these days to categorize the bear declines of 7/16/90-10/11/90 (which coincided with the start of an economic recession) and 7/17/98-8/31/98.

Source: Bloomberg Finance, L.P., ClearBridge Investments.


The first noteworthy observation is that bear declines are much shorter than bull rallies: the two longest bear declines lasted less than two years, while 12 bull rallies lasted more than two years and eight lasted more than four years!

Second, there is no clear pattern in the duration and severity of bear declines following long bull rallies. Looking at the three longest bull rallies excluding the current one, the 1990-1998 rally was followed by a sharp 21% decline in just 45 days, the 1949-1956 rally was followed by a 22% decline over the subsequent 15 months, and the 1974-1980 rally was followed by a 27% decline over a 21-month period. The data also shows that these three bear declines were much less severe than the more dramatic bear declines of 2007-2008 (-52% in 14 months) and 1973-1974 (-48% in 21 months). Having said that, there is nothing comfortable or enjoyable about the experience of investing through a 20% decline, whether that happens in 45 days or over many months. But the point is that we cannot predict how long a rally will last and how it might end.

In conclusion, this descriptive analysis is interesting to the extent that it characterizes the current rally in terms of duration and the stage of maturity. As the longest rally in history, it is reasonable to argue that the current rally might be on its last legs. At the same time, this rally has not experienced the performance or the phase of euphoria observed during the final stages of a number of past comparably long rallies, which would argue for further upside before the rally is exhausted. It is certainly tempting to prognosticate about when and how the current rally might end, but, as faithful observers of market cycles, we don’t believe it to be prudent or practical.

Farhan Mustafa

Head of Investment Risk Mgt., Head of Quantitative Research
15 Years experience
15 Years at ClearBridge

Related Perspectives

  • All opinions and data included in this commentary are as of March 2017 and are subject to change. The opinions and views expressed herein are of Farhan Mustafa and may differ from portfolio managers, analysts or the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither ClearBridge Investments, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.

  • Past performance is no guarantee of future results.

  • 1

    S&P 500 and Dow Jones Industrial Average are at historic highs on a nominal as well as real (inflation-adjusted) basis. Meanwhile, the Nasdaq Composite is at a historic high only in nominal terms; in real terms, the technology-heavy index hit a historic high of 7,211 in March 2000 and its current value around 5,700 is still ~25% below that. (Source: Bloomberg Finance, L.P., ClearBridge Investments.)

  • 2

    The S&P 500 was called the Composite Index when it was first introduced in 1923 to track a small number of stocks. The index was expanded to 90 stocks in 1926 and to its current 500 members in 1957. (Source: Wikipedia.)