<p>Bull Market Phases: A Graphical Presentation</p><p>An Analysis of Bull Markets on the Johannesburg Stock Exchange</p><p>By Daniel R Wessels</p><p>August 2010 31 January 1960 – 31 July 2010</p><p>1. Bull Market Cycles</p><p> Seven complete cycles since 1960</p><p> Bull market = Trough to peak (market low to market high)</p><p>Bull and Bear Market Cycles</p><p>100,000 e l a c S</p><p> g</p><p> o 10,000 L</p><p> x e d n I</p><p> e r 1,000 a h S</p><p> l l A</p><p>E S</p><p>J 100</p><p>E S T F</p><p>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</p><p>2 2. Bull Market Periods</p><p> Trough to peak</p><p> Start of bull market at 40-60% of previous market high</p><p> Average duration 66 months</p><p> Average duration to surpass previous market high (peak) 20 months</p><p> Three distinctive bull market phases; recovery, consolidation and optimism</p><p>Recovery: </p><p> The recovery phase is typically the largest contributor of overall bull market return</p><p> The expansion of the market’s P/E multiple is the major driver of returns during the first phase </p><p>Consolidation:</p><p> Relatively benign market returns during the consolidation phase</p><p> Typically the smallest contributor of gains during the bull market cycle </p><p> The resurgence of companies’ earnings growth is the major driver of returns during the second phase </p><p>Optimism:</p><p> Both earnings growth and P/E multiple expansion contribute to the overall gains during the third phase</p><p> Typically the second most important phase of the overall bull market cycle</p><p>3 Dividing the bull market cycle in three phases of equal duration… </p><p>Bull Market Phases</p><p>3rd Phase 1st Phase 33% 34%</p><p>2nd Phase 33%</p><p>But each phase contributed differently…</p><p>Bull Market Experience Contribution of different phases to overall bull market return</p><p>3rd Phase 37%</p><p>1st Phase 46%</p><p>2nd Phas e 17%</p><p>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 … </p><p>Bull Market Analysis Relative contributions of change in P/E multiple and earnings growth during each phase of bull market </p><p>100%</p><p>) 90% s t n</p><p> i 80% o p 70% e g a</p><p> t 60% n e</p><p> c 50% r e p (</p><p>40% n o i 30% s n</p><p> a 20% p x</p><p>E 10% 0% 1st Phase 2nd Phase 3rd Phase</p><p>P/E Multiple Earnings Growth</p><p>5 2.1 April 1961 – April 1969</p><p>Duration: 96 months</p><p>Total return: 462%</p><p>Annualised return: 24.1%</p><p>Start of bull market: 64% of previous market high</p><p>Duration to surpass previous market high: 17 months</p><p>Bull Market Period Apr 1961 - Apr 1969</p><p>350</p><p>300</p><p>250 e u l</p><p> a 200 v</p><p> x</p><p> e 150 d n I 100</p><p>50</p><p>-</p><p>Date</p><p>6 Contribution of each phase to the overall gain…</p><p>Bull Market April 1961-April 1969</p><p>1st Phase 33%</p><p>3rd Phase 56%</p><p>2nd Phase 11%</p><p>And the relative contribution of earnings growth and change in P/E multiple… </p><p>Relative Contribution</p><p>100%</p><p>80% n o i t</p><p> u 60% b i r t</p><p> n Earnings Grow th o</p><p> c 40%</p><p> e P/E Multiple g a t</p><p> n 20% e c r e P 0%</p><p>-20% 1st Phase 2nd Phase 3rd Phase</p><p>7 2.2. October 1971 – March 1974</p><p>Duration: 29 months</p><p>Total return: 178%</p><p>Annualised return: 52.6%</p><p>Start of bull market: 38% of previous market high</p><p>Duration to surpass previous market high: 29 months</p><p>Bull Market Period Oct 1971 - March 1974</p><p>350</p><p>300</p><p>250 e u l</p><p> a 200 v</p><p> x</p><p> e 150 d n I 100</p><p>50</p><p>-</p><p>Date</p><p>8 Contribution of each phase to the overall gain…</p><p>Bull Market October 1971-March 1974</p><p>3rd Phase 17%</p><p>2nd Phase 15%</p><p>1st Phase 68%</p><p>And the relative contribution of earnings growth and change in P/E multiple…</p><p>Relative Contribution</p><p>100% 90% 80% n o i</p><p> t 70% u b i</p><p> r 60% t</p><p> n Earnings Grow th o</p><p> c 50%</p><p> e P/E Multiple g</p><p> a 40% t n</p><p> e 30% c r e</p><p>P 20% 10% 0% 1st Phase 2nd Phase 3rd Phase</p><p>9 2.3 August 1976 – October 1980</p><p>Duration: 50 months</p><p>Total return: 387%</p><p>Annualised return: 46.2%</p><p>Start of bull market: 49% of previous market high</p><p>Duration to surpass previous market high: 35 months</p><p>Bull Market Period Aug 1976 - Oct 1980</p><p>900 800 700</p><p> e 600 u l</p><p> a 500 v</p><p> x</p><p> e 400 d n I 300 200 100 -</p><p>Date</p><p>10 Contribution of each phase to the overall gain…</p><p>Bull Market August 1976-October 1980</p><p>1st Phase 29%</p><p>3rd Phase 58% 2nd Phase 13%</p><p>And the relative contribution of earnings growth and change in P/E multiple…</p><p>Relative Contribution</p><p>100% 90% 80% n o i t 70% u b i r</p><p> t 60%</p><p> n Earnings Grow th o</p><p> c 50%</p><p> e P/E Multiple</p><p> g 40% a t n</p><p> e 30% c r e 20% P 10% 0% 1st Phase 2nd Phase 3rd Phase</p><p>11 2.4 Jun 1982 – August 1987</p><p>Duration: 62 months</p><p>Total return: 498%</p><p>Annualised return: 41.3%</p><p>Start of bull market: 53% of previous market high</p><p>Duration to surpass previous market high: 10 months</p><p>Bull Market Period Jun 1982 - Aug 1987</p><p>3,000</p><p>2,500</p><p> e 2,000 u l a v 1,500 x e d n I 1,000</p><p>500</p><p>-</p><p>Date</p><p>12 Contribution of each phase to the overall gain…</p><p>Bull Market June 1982-August 1987</p><p>1st Phase 39% 3rd Phase 51%</p><p>2nd Phase 10%</p><p>And the relative contribution of earnings growth and change in P/E multiple…</p><p>Relative Contribution</p><p>100% 90% 80% n o i t 70% u b i r</p><p> t 60%</p><p> n Earnings Grow th o</p><p> c 50%</p><p> e P/E Multiple</p><p> g 40% a t n</p><p> e 30% c r e 20% P 10% 0% 1st Phase 2nd Phase 3rd Phase</p><p>13 2.5 February 1988 – April 1998</p><p>Duration: 122 months</p><p>Total return: 441%</p><p>Annualised return: 18.1%</p><p>Start of bull market: 56% of previous market high</p><p>Duration to surpass previous market high: 18 months</p><p>Bull Market Period Feb 1988 - Apr 1998</p><p>8,000 7,000 6,000 e</p><p> u 5,000 l a v 4,000 x e d</p><p> n 3,000 I 2,000 1,000 -</p><p>Date</p><p>14 Contribution of each phase to the overall gain…</p><p>Bull Market February 1988-April 1998</p><p>3rd Phase 29% 1st Phase 42%</p><p>2nd Phase 29%</p><p>And the relative contribution of earnings growth and change in P/E multiple…</p><p>Relative Contribution</p><p>100% 90% 80% n o i t 70% u b i r</p><p> t 60%</p><p> n Earnings Grow th o</p><p> c 50%</p><p> e P/E Multiple</p><p> g 40% a t n</p><p> e 30% c r e 20% P 10% 0% 1st Phase 2nd Phase 3rd Phase</p><p>15 2.6 August 1988 – May 2002</p><p>Duration: 45 months</p><p>Total return: 150%</p><p>Annualised return: 27.7%</p><p>Start of bull market: 61% of previous market high</p><p>Duration to surpass previous market high: 15 months</p><p>Bull Market Period Aug 1988 - May 2002</p><p>12,000</p><p>10,000</p><p> e 8,000 u l a v 6,000 x e d n I 4,000</p><p>2,000</p><p>- 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</p><p>16 Contribution of each phase to the overall gain…</p><p>Bull Market August 1998-May 2002</p><p>3rd Phase 20%</p><p>2nd Phase 13% 1st Phase 67%</p><p>And the relative contribution of earnings growth and change in P/E multiple…</p><p>Relative Contribution</p><p>100% 90% 80% n o i t 70% u b i r</p><p> t 60%</p><p> n Earnings Grow th o</p><p> c 50%</p><p> e P/E Multiple</p><p> g 40% a t n</p><p> e 30% c r e 20% P 10% 0% 1st Phase 2nd Phase 3rd Phase</p><p>17 2.7 April 2003 – May 2008</p><p>Duration: 61 months</p><p>Total return: 324%</p><p>Annualised return: 32.8%</p><p>Start of bull market: 67% of previous market high</p><p>Duration to surpass previous market high: 17 months</p><p>Bull Market Period Apr 2003 - May 2008</p><p>35,000</p><p>30,000</p><p>25,000 e u l</p><p> a 20,000 v</p><p> x</p><p> e 15,000 d n I 10,000</p><p>5,000</p><p>-</p><p>Date</p><p>18 Contribution of each phase to the overall gain…</p><p>Bull Market April 2003-May 2008</p><p>3rd Phase 30% 1st Phase 40%</p><p>2nd Phase 30%</p><p>And the relative contribution of earnings growth and change in P/E multiple…</p><p>Relative Contribution</p><p>100% 90% 80% n o i t 70% u b i r</p><p> t 60%</p><p> n Earnings Grow th o</p><p> c 50%</p><p> e P/E Multiple</p><p> g 40% a t n</p><p> e 30% c r e</p><p>P 20% 10% 0% 1st Phase 2nd Phase 3rd Phase</p><p>19 3. Since February 2009…</p><p>Bull Market Period Since February 2009</p><p>30,000</p><p>28,000</p><p>26,000 e u l</p><p> a 24,000 v</p><p> x</p><p> e 22,000 d n I 20,000</p><p>18,000</p><p>16,000</p><p>Date</p><p>Gains (excl dividends) = Earnings growth + P/E multiple expansion</p><p>Gains (excl dividends) = 54%</p><p>Earnings Growth = -26%</p><p>Contribution of P/E multiple expansion = 80% For example, February 2009 P/E multiple = 8.2 and July 2010 P/E multiple = 17.0</p><p> All the gains thus far can be attributed to P/E multiple expansion; typically a phase 1 type of bull market.</p><p> 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. </p><p>20 DRW Investment Research</p><p>Disclaimer:</p><p>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.</p><p>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. </p><p>21</p>