The terms “Bull Market” and “Bear Market” are used often but it seems that there is some difference of opinion as to what they really mean. One often used definition by the business media uses a quantitative measurement using a 20% rise or decline to identify a Bull or a Bear market. This appears straight forward but it does create confusion in volatile markets as sharp rallies and corrections may result in markets alternating from Bull to Bear too often to be useful.
More helpful definitions of Bull and Bear markets are more qualitative with a focus on long- term structure and trend and not a specific percentage change:
Bull Market = A market trending higher with a series of higher highs and higher lows.
Bear Market = A market trending lower with a series of lower highs and lower lows.
The difference between a Bull and Bear market involves a major a change of trend. A Bear market begins when a Bull market ends and visa versa not when market participants finally realize that the trend has changed. Technical charts may be of some help in identifying potential trend changes in markets but the confirmation may only occur in hindsight. The last Bear market in hindsight clearly ended in March 2009 but the investing public did not embrace the trend change until years later.
Where are We Now?
The S&P 500 in the U.S. reached a recent peak in late January 2018 (shortly after our January Blog article on Volatility). Since then the market has been in a 10% trading range and time will tell whether that high was the end of a bull market or another consolidation within a larger bull market. Healthy and normal markets are punctuated with periods of consolidation and we continue to keep an open mind with respect to future market direction. We have increased portfolio weightings in GICs, cash equivalents, and precious metals. We are avoiding high priced momentum stocks and have reduced weightings in banks and financials.
S&P 500 July 2017-July 2018 (Source Thomson One)
Momentum vs Value
“Momentum” strategies tend to focus on late stage bull markets. The price of the market has become overvalued on a historical basis and the sentiment has become extremely positive. The feeling is that the market will never go down. This strategy often gets into challenges when the market turns as was the case in 1973, 2000 and 2008. As written previously, the growth and prevalence of Exchange Traded Funds (ETFs) may be elongating the present market cycle resulting in the outperformance of certain sectors of the market. Momentum works until is doesn’t and trend changes may happen very quickly.
“Value” strategies tend to focus on very inexpensive markets that may have been in a bear market for a period of time. The feeling usually is that the market will never go higher. This strategy requires patience so dividends are helpful if available. The prevalence of ETFs in the market may have resulted in value strategies requiring even more patience as capital focuses on sectors that are showing positive performance. This strategy involves a lot of fundamental analysis including a focus on corporate balance sheets.
Buying overpriced investments is problematic and that is why we consistently focus on reasonable value and avoid parabolic markets. Buying “Value” has always appeared attractive but investments require a catalyst to move higher and one looks to avoid “value traps”. Current markets seem to require a focus on capital flows and an appreciation of where money is moving and/or likely to move in the future. With few exceptions this results in a focus on buying large dividend paying companies when they are on sale.
This publication is solely the work of Jon Batchelor for the private information of his clients. Although the author is a Manulife Securities Advisor, he is not a financial analyst at Manulife Securities Incorporated and Manulife Securities Insurance Inc. This is not an official publication of Manulife Securities. The views, opinions and recommendations are those of the author alone and they may not necessarily be those of Manulife Securities. This publication is not an offer to sell or a solicitation of an offer to buy any securities. This publication is not meant to provide legal, accounting or account advice. As each situation is different, you should seek advice based on your specific circumstances. Please call to arrange for an appointment. The information contained herein was obtained from sources believed to be reliable; however, no representation or warranty, express or implied, is made by the writer, Manulife Securities or any other person as to its accuracy, completeness or correctness.