Stock Market Cycles: a Graphical Presentation

Bull Market Phases: A Graphical Presentation

An Analysis of Bull Markets on the Johannesburg Stock Exchange

By Daniel R Wessels

August 2010 31 January 1960 – 31 July 2010

1. Bull Market Cycles

 Seven complete cycles since 1960

 Bull market = Trough to peak (market low to market high)

Bull and Bear Market Cycles

100,000 e l a c S

o 10,000 L

x e d n I

e r 1,000 a h S

E S T F

10 0 3 6 9 2 5 8 1 4 7 0 3 6 9 2 5 8 6 6 6 6 7 7 7 8 8 8 9 9 9 9 0 0 0 ------n n n n n n n n n n n n n n n n n a a a a a a a a a a a a a a a a a J J J J J J J J J J J J J J J J J

2 2. Bull Market Periods

 Trough to peak

 Start of bull market at 40-60% of previous market high

 Average duration 66 months

 Average duration to surpass previous market high (peak) 20 months

 Three distinctive bull market phases; recovery, consolidation and optimism

Recovery:

 The recovery phase is typically the largest contributor of overall bull market return

 The expansion of the market’s P/E multiple is the major driver of returns during the first phase

Consolidation:

 Relatively benign market returns during the consolidation phase

 Typically the smallest contributor of gains during the bull market cycle

 The resurgence of companies’ earnings growth is the major driver of returns during the second phase

Optimism:

 Both earnings growth and P/E multiple expansion contribute to the overall gains during the third phase

 Typically the second most important phase of the overall bull market cycle

3 Dividing the bull market cycle in three phases of equal duration…

Bull Market Phases

3rd Phase 1st Phase 33% 34%

2nd Phase 33%

But each phase contributed differently…

Bull Market Experience Contribution of different phases to overall bull market return

3rd Phase 37%

1st Phase 46%

2nd Phas e 17%

4 The overall gain (excluding dividends) during each phase of the bull market is equal to earnings growth and change in P/E multiple of the market …

Bull Market Analysis Relative contributions of change in P/E multiple and earnings growth during each phase of bull market

) 90% s t n

i 80% o p 70% e g a

t 60% n e

c 50% r e p (

40% n o i 30% s n

a 20% p x

E 10% 0% 1st Phase 2nd Phase 3rd Phase

P/E Multiple Earnings Growth

5 2.1 April 1961 – April 1969

Duration: 96 months

Total return: 462%

Annualised return: 24.1%

Start of bull market: 64% of previous market high

Duration to surpass previous market high: 17 months

Bull Market Period Apr 1961 - Apr 1969

250 e u l

a 200 v

e 150 d n I 100

6 Contribution of each phase to the overall gain…

Bull Market April 1961-April 1969

1st Phase 33%

3rd Phase 56%

2nd Phase 11%

And the relative contribution of earnings growth and change in P/E multiple…

Relative Contribution

80% n o i t

u 60% b i r t

n Earnings Grow th o

e P/E Multiple g a t

n 20% e c r e P 0%

-20% 1st Phase 2nd Phase 3rd Phase

7 2.2. October 1971 – March 1974

Duration: 29 months

Total return: 178%

Bull Market Period Oct 1971 - March 1974

250 e u l

a 200 v

e 150 d n I 100

Bull Market October 1971-March 1974

3rd Phase 17%

2nd Phase 15%

1st Phase 68%

100% 90% 80% n o i

t 70% u b i

r 60% t

e P/E Multiple g

a 40% t n

e 30% c r e

P 20% 10% 0% 1st Phase 2nd Phase 3rd Phase

9 2.3 August 1976 – October 1980

Duration: 50 months

Total return: 387%

Bull Market Period Aug 1976 - Oct 1980

900 800 700

e 600 u l

a 500 v

e 400 d n I 300 200 100 -

Bull Market August 1976-October 1980

1st Phase 29%

3rd Phase 58% 2nd Phase 13%

100% 90% 80% n o i t 70% u b i r

e P/E Multiple

g 40% a t n

e 30% c r e 20% P 10% 0% 1st Phase 2nd Phase 3rd Phase

11 2.4 Jun 1982 – August 1987

Duration: 62 months

Total return: 498%

Bull Market Period Jun 1982 - Aug 1987

e 2,000 u l a v 1,500 x e d n I 1,000

Bull Market June 1982-August 1987

1st Phase 39% 3rd Phase 51%

2nd Phase 10%

100% 90% 80% n o i t 70% u b i r

e P/E Multiple

g 40% a t n

13 2.5 February 1988 – April 1998

Duration: 122 months

Total return: 441%

Bull Market Period Feb 1988 - Apr 1998

8,000 7,000 6,000 e

u 5,000 l a v 4,000 x e d

n 3,000 I 2,000 1,000 -

Bull Market February 1988-April 1998

3rd Phase 29% 1st Phase 42%

2nd Phase 29%

100% 90% 80% n o i t 70% u b i r

e P/E Multiple

g 40% a t n

15 2.6 August 1988 – May 2002

Duration: 45 months

Total return: 150%

Bull Market Period Aug 1988 - May 2002

12,000

10,000

e 8,000 u l a v 6,000 x e d n I 4,000

- 0 1 8 9 9 0 1 2 9 0 0 0 1 2 8 8 9 9 9 0 1 1 1 9 9 0 0 0 0 0 9 9 0 0 9 9 9 0 0 0 0 0 9 9 0 0 ------r t r t r t t r g g g g c c c c b n b n b n b c c c c p p p p u e u e u e u e u e u u e e e O A O A O A O A J J J A F A F A F A F D D D D Date

Bull Market August 1998-May 2002

3rd Phase 20%

2nd Phase 13% 1st Phase 67%

100% 90% 80% n o i t 70% u b i r

e P/E Multiple

g 40% a t n

17 2.7 April 2003 – May 2008

Duration: 61 months

Total return: 324%

Bull Market Period Apr 2003 - May 2008

35,000

30,000

25,000 e u l

a 20,000 v

e 15,000 d n I 10,000

Bull Market April 2003-May 2008

3rd Phase 30% 1st Phase 40%

2nd Phase 30%

100% 90% 80% n o i t 70% u b i r

e P/E Multiple

g 40% a t n

e 30% c r e

P 20% 10% 0% 1st Phase 2nd Phase 3rd Phase

19 3. Since February 2009…

Bull Market Period Since February 2009

30,000

28,000

26,000 e u l

a 24,000 v

e 22,000 d n I 20,000

18,000

16,000

Gains (excl dividends) = Earnings growth + P/E multiple expansion

Gains (excl dividends) = 54%

Earnings Growth = -26%

Contribution of P/E multiple expansion = 80% For example, February 2009 P/E multiple = 8.2 and July 2010 P/E multiple = 17.0

 All the gains thus far can be attributed to P/E multiple expansion; typically a phase 1 type of bull market.

 Next, expect consolidation (phase 2) as earnings starts to recover but further P/E multiple expansion unlikely. Overall, most likely subdued returns can be expected over the short to medium term.

20 DRW Investment Research

Disclaimer:

Please note that all the material, opinions and views herein do not constitute investment advice, but are published primarily for information purposes. The author accepts no responsibility for investors using the information as investment advice. Please consult an authorised investment advisor.

Unless otherwise stated, the author is the sole proprietor of this publication and its content. No quotations from or references to this publication are allowed without prior approval.