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What Happens to Stocks at the End of Bull Markets

Jeff Clark, Senior Precious Metals Analyst, GoldSilver 

Here’s What Historically Happens to Stocks When Bull Markets End

You undoubtedly know that 2017 and 2018 have been record-setting years for the broad stock markets. While 2018 saw a 6-month slump after hitting record highs throughout January, the correction soon ended, with the Dow Jones reaching new highs in late September and early October.

In a time of bull markets for stocks, investors seldom bother to look elsewhere. Gold was up in 2017 despite numerous headwinds, and even major banking institutions are bullish on its future prospects. But most mainstream investors aren’t paying much attention to gold since they keep seeing so much green in their stock portfolios.

Even I was taken back by some of the data from the bull market in stocks:

  1. The Dow hit a record high 71 times in 2017. On average, a new high was hit more frequently than once a week. In 2018, things have slowed down a bit, but it has still hit 15 record highs as of early October.
  2. For the first time ever in its almost 90-year history, the S&P 500 rose every month in 2017. And historically, there have only been four years with gains in 11 months of the year.
  3. The S&P’s largest pullback in 2017 was 2.8 percent, the smallest since 1995.
  4. To start 2018, the S&P 500 rose in each of the five trading sessions, hitting a new record high every day. The last time the index opened the year with at least five straight record highs was 1964. The trend continued into August, where the S&P reached another all-time high. Soon it will be the longest bull market in history — if it isn’t already by the time you read this.
  5. And as Mike pointed out in his 2018 predictions, the CAPE (Cyclically Adjusted Price-Earnings) ratio has now matched its 1999 level, the second highest reading in over 100 years of data. The CAPE now has a higher reading only in 1929.

This all begs the question: is the bull market about to come to an end? This is exactly the kind of frothy behavior a market sees near its apex, so it’s definitely a prudent question to ask. We all know what happens to stocks in a bull market — they keep going up. But what about when the bull loses its horns? The year is coming soon when the bull market reaches its peak. What does history say could happen to stocks in the first year of a bear market?

We dug up the data for all bull markets in the S&P since the year 1900, and then examined what happened in the very first year after each of those bull markets ended. In other words, what did the first year of the bear market look like after the last full year of the bull market? This could be useful data if this year ends up being the peak of the bull market.

Here’s what history shows.

First Year Performance of Bear Market After a Bull Market Ends

What can we learn from this data and from the current market? Consider:

  1. While the declines for the first year of the bear market varied greatly, you can see that on average, the S&P lost 16 percent the year immediately following the last year of the bull market. This matches the 16 percent average gain the market had during this final “bull year”, although there was little correlation for specific markets between final-year gains and first-year losses.
  2. Also, notice that the decline was measured in single digits in only four cases — all others were double-digit losses, with the highest been the 33 percent loss at the onset of the Great Depression.
  3. Mike Maloney believes the year is coming soon where overvalued stocks begin their descent. If Mike is right, the decline could be higher than the historical average. This is because, as pointed out previously, this is on the verge of the longest bull market in history, and there are a lot of overvalued stocks.
  4. What is gold likely to do in that environment? We’ve shown before that gold has acted as a buffer — and gained ground — in most of the biggest stock market crashes.

The bottom line for us is that we think a major shift is coming — not just in overpriced stock, bond and real estate markets, but in the currencies that have been abused by many central bankers the world over. Once the process gets underway, the mainstream will turn back to mankind’s oldest form of money in mass, and our patience and forethought will pay off.

Mike and I continue to buy physical gold and silver. If you’d like to follow our lead, you can order American gold Eagles and silver Eagles now along with other popular precious metal coins in a variety of weights, designs and quantities.