The birth and death of a bull market cycle
“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria” – John Templeton
The bottom of the last and one of the worst bear markets was in December 2008. In early 2009 the U.S. markets were trading at bargain prices. Fear in the street was palpable and many had the opinion that this was the end of investing in anything American (some still hold this view when it comes to U.S. denominated assets). However, by March of 2009 the birth of the current bull market had already started. Nevertheless it was not until fall of 2010 that unsophisticated investors started taking note that there may be some hope in stocks. As recently as September 2010 there were articles in various business magazines with the headline “death of equities”.
Even though the market has actually been on a bullish run for almost 2 years, recouping most of its losses, average investors are just starting to tip toe back into stocks as they realize the potential. The sustained bull market has restored some confidence. Slowly they are moving funds out of fixed income assets with low yields and into stocks. Based on the historical behaviour of investors, there is still at least a few years left in this bull market. Applying John Templeton’s philosophy, we are in the early stage of optimism and still far from euphoria.
Market timing will become increasingly important as average investors become more and more bullish about the market. Through market timing and adopting a disciplined, non-emotional approach, investors can participate in the mini bull-runs and at the same time preserve capital during minor downturns, taking full advantage of this bull.
Historically, unsophisticated investors come into a bull market late in the game when the media headlines are all positive about equities. By the time they get all their money in, the market is actually in the euphoria stage. This is when hawkish investors need tight risk control mechanisms to move quickly into cash. A market crash will inevitably occur because there is no new cash flowing into the market and big volume traders are on the side line. This is usually the onset of another bear market.