Unloved Bull Markets

Chapter 2Was the Bull Market Sensible?

We can only assume that investors and money managers with bearish sentiments sitting in cash must have been baffled by the market advances. By no measure could the bull market have been considered sensible to these doubters, because it behaved against all of their expectations. Was it unusual? Actually not. This chapter will show that it was very typical regarding annual returns, sector returns, and in rewarding volatility tolerance. It was sensible based on fundamentals such as earnings and value. Even its daily behavior in terms of up days and down days was typical of bull markets, and it had the usual big day surges.

Annual Returns

Originally assembled by Ibbotson & Associates, we have data on the S&P 500 Index back to 1926. Figure 2.1 shows annual returns in a frequency distribution. For example, twenty-one years the return was between 10% and 20% (tall column in the middle). The annual return is positive 74% of the years. Returns are fairly normally distributed (bell-shaped curve) with a slight skew. The average annual return has been 12.4%, and the compounded annual return has been 10.6%.

Figure 2.1 S&P 500 Annual Returns (1926–2020)

Before looking at the returns during the bull market, 2008 stands out as a very unusual year with its negative 37% return being second lowest out of ninety-five years. The twelve years since 2008 ...