Recently someone asked me, “When did this bull market start?” It’s a great question because it can provide insight into whether the market is getting overextended.
Of course, bull markets have no specific length or expiration date. We can’t predict that there is “only X years” left in the current bull market. On the other hand, we also know that they don’t last forever. Some event will come along and eventually put an end to the party.
So where might we be in that cycle?
Before we answer that question, let’s think about what defines the beginning and end of a bull market.
When Does a Bull Market Begin & End?
Though there is no widely agreed upon definition, I’ve seen the following beliefs about when a bull market begins:
- After a 20% rally from the lows
- After a huge surge in optimism among investors (e.g. a big jump in investor sentiment)
- Multiple months of price increases
And, if we assume this is when a bull market begins, then a bull market ends when the opposite occurs:
- After a 20% decline from all-time highs
- After a huge surge in pessimism among investors (e.g. a large decline in investor sentiment)
- Multiple months of price decreases
While all of these conditions work, my philosophy for when a bull market begins and ends is based on what I like to call a “clearing event.” I would define a clearing event as any time when there is a significant decrease in both stock prices and investor sentiment. In other words, it’s all of the conditions above at the same time.
If you accept my clearing event idea, then a bull market would begin when we recover from a clearing event and an end when a new clearing event comes around.
Let’s run this logic from when I started investing in July 2012 to determine whether we had any clearing events.
Were There Any Clearing Events Since 2012?
Back in 2012, we were in the earliest stages of a bull market following the recovery from the GFC, a massive clearing event. Since then, I’ve seen the following declines in the U.S. stock market:
- Late 2015 (-12%)
- Early 2016 (-10%)
- Late 2018 (-18%)
- Early 2020 (-33%)
- 2022 (-25%)
Were any of these “clearing events”? For the most part, no.
The late 2015 and early 2016 declines were your typical run-of-the-mill intrayear pullbacks. These kinds of dips happen almost every other year, on average. The late 2018 drop was bigger, but also didn’t signal a massive shift in sentiment, so that wasn’t a clearing event either.
Now here is where I am going to lose some of you. The early 2020 COVID-related decline also wasn’t a clearing event. Though the market was down 33% at one point and the world was in panic, we avoided what would’ve been a large clearing event because the U.S. government stepped in with monetary and fiscal stimulus. And since the decline and recovery was so fast, the bull market continued unabated.
This explains why 2020 was an up year for U.S. stocks and why the S&P 500 saw a 76% return (not including dividends) from March 2020 to March 2021. That’s the 3rd greatest 1-year return in U.S. stock market history. The only two years which were better both occurred during the recovery from The Great Depression in the 1930s.
This leaves us with just one clearing event since I started investing in 2012—the 2022 decline. Let’s see why this decline officially ended the 2010s bull market.
Why 2022 Ended the 2010s Bull Market
The 2022 decline was not like any of the others over the past decade. Not only did stocks fall by 25%, but investor sentiment went with it. Investors started caring about profits as the Fed raised rates and there was a massive shift in expectations as a result.
You can see this clearly when you look at what happened to a lot of the big tech companies in 2022. Their prices fell of a cliff. For example, consider what happened to Meta, Amazon, and Netflix relative to the S&P 500 over this time period:
For these tech companies, the 2020 COVID decline barely registers in the chart above. Relative to 2022, it’s hard to tell it even happened. This is why 2022 was a clearing event and 2020 wasn’t. 2022 put an end to the decade long bull market of the 2010s.
Normally, such an end to a bull market would’ve lasted longer. I would’ve expected it to take at least a few years after 2022 before stocks turned around. But something happened in late 2022 that changed all of this.
ChatGPT: The Beginning of a New Bull Market
In November 2022, OpenAI launched ChatGPT which laid the foundation for our current bull market.
Without a doubt, this is what pulled us out of the late 2022 slump and started the rally we are still experiencing today. You can see this if you look at Meta, Amazon, and Netflix’s returns since the 2022 bottom:
Since the launch of ChatGPT, Big Tech has added over $8 trillion in total market cap. Because of this, it can feel like the 2022 decline never happened. But it did and it would’ve likely lasted longer had it not been for the launch and widespread appeal of generative AI.
So when people ask me when the bull market started, I have no choice but to say November 2022. This AI-fueled rally is what is holding up the market. And if the promises of AI fail to materialize, then much of the gains we’ve seen since November 2022 will likely go with it. Therefore, the bigger question is: how long can this AI rally last?
Unfortunately, I don’t know. There are people in the AI space who think that this is just the beginning. And there are others who are a bit skeptical of AI’s promise. I won’t provide my opinion because I simply don’t know enough about the discussion. In a Buffett-esque style response, it’s outside my circle of competence.
Either way, I didn’t write this post to tell you when this bull market will end. I wrote it to tell you that a new bull market has begun. This isn’t the stock market of the 2010s anymore, which means it’s anyone’s guess how long it might last. And, believe it or not, whoever wins the U.S. election today won’t impact the market as much as you think.
With that being said, happy voting and thank you for reading!
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This is post 423. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
