The world entered a new global bull market in 2020. After plunging into a bear market when the Covid epidemic hit, global stock markets have bounced back and entered into a new bull market which should last for several years. Using Global Financial Data’s MTB (Market Tops and Bottoms) Indicator, which calculates the number of market tops and bottom worldwide, we found that previous bottoms occurred in 2002, 2009 and 2020. Based upon the behavior of previous bull markets, this bull market is likely to continue for several years.
Global Bull and Bear Markets
Global Financial Data (GFD) tracks bull and bear markets in over 100 stock markets. GFD has calculated the beginning and end of each bull and bear market throughout the world since 1602, GFD defines a bear market as a 20% decline in the national market index and a bull market as either a 50% increase in the national market index or when the index reaches a new all-time high.
The 2020 market bottom occurred in a record 106 countries, more than any other bear market in history. Forty-nine markets topped out in 2018, eleven in 2019 and forty-three in 2020. For some countries, such as the United States, this was the shortest bear market in its history. Although 2020 had the largest number of bear market bottoms, because the bull market top was spread out over 2018 to 2020, 2007 had the largest number of bull market tops.
How significant the market bottom is depends upon the number of markets that hit a bottom and start to bounce back. Global markets are integrated, and bear markets often occur across global markets simultaneously. Since bear markets usually last a year or two and bull markets last five to ten years, a significant number of bear market bottoms can give investors confidence that they have a new bull market that they can invest in and stick with the bull market for several years to come.
Figure 1. Number of Global Bull Market Tops, 1900 to 2020
Figure 1 shows the number of markets hitting bull market tops. The market tops in 1920, 1929, 1937, 1969, 1973, 1981, 2000 and 2007 are clearly visible. They were followed by market bottoms that occurred a few years after those peaks. There were fewer market tops and bottoms in the 1950s and 1960s as the bull market roared ahead. The actual number of tops and bottoms expanded in the 1990s when many countries opened stock markets after the collapse of communism or in an attempt to bring capital into emerging markets. After the market peaked in 2000, it took three years of bear market bottoms for global markets to start moving forward again. Until last year, 2007 had the largest number of bull market tops in history followed by the largest number of bear market bottoms in 2009.
Figure 2. Number of Global Bear Market Bottoms, 1900 to 2020
Figure 2 shows a graph of the number of global market bottoms that have occurred since 1900. The market bottoms follow the market tops, but take different periods of time and vary from one country to another. Market tops occurred in different countries in 2018, 2019 and 2020, but virtually every market hit its bottom in 2020. So the market bottoms are more pronounced than the market tops. Significant market bottoms occurred in 1921, 1932, 1940, 1949, 1962, 1971, 1974, 1982, 1998, 2009 and 2020. Global bear market bottoms tend to come in 10-year intervals.
Figure 3. Number of Global Bull Market Tops Minus Number of Bear Market Bottoms, 1900 to 2020
Figure 3 subtracts the number of bull market bottoms from the number of bull market tops which provides an additional metric for measuring global bull and bear markets. This provides a good analysis of when the global market tops occurred and when the global market bottoms occurred as well as how strong those global market bottoms and tops were.
The Market Bubble of the 2020s
We have previously remarked that the 2020s could produce a bull market bubble that could collapse by the end of the decade. As the data previously discussed shows, most bull markets last around ten years. There are obvious exceptions to this rule, such as the market tops in 1969 and 1973 or 1987 and 1990, but bull markets of about ten years are the most common. There were similar bull markets ending in bubbles in 1720, 1825 and 1929. Does this mean that we are preparing for a similar once-in-a-century global bubble?
Each of the previous bull market bubbles occurred after debt had built up and the government tried to reduce their debt burden. Although no war occurred in the 2010s, governments through the world issued excessive amounts of debt with debt in Japan exceeding 200% of GDP. While interest rates rose in the previous episodes in response to the excessive debt, currently interest rates are at their lowest levels in history. Yields on ten-year bonds are negative in most of Europe and low in the rest of the developed world.
One of the concerns about the current bull market is that even though it began a year ago, the stock market is already at valuation levels that typically occur at the end of a bull market, not the beginning. The ratio of market capitalization/GDP is now twice GDP in the United States. How much further the bull market can climb will depend upon investors’ willingness to invest in the market, and a bull market like the 1980s and 1990s seems unlikely given the current valuations.
Figure 4. United States Stock Market Capitalization as a Percentage of GDP, 1792 to 2021
One explanation for this phenomenon is that interest rates and bond yields are at their lowest levels in history, and low interest rates can support a higher P/E Ratio. This makes it difficult to compare the P/E ratio and market cap/GDP ratios with historical values.
Robert Shiller has changed his measurement of the CAPE Ratios, inverting them and then subtracting the bond yield from this value. By using this inverted CAPE Ratio, or CAPE yield, valuations are more in line with the past. High interest rates in the 1980s and 1990s caused the CAPE Yield to turn negative, but it has returned to positive territory since the Great Financial Crisis of 2008.
Figure 5. United States CAPE Yield, 1842 to 2020
The past decade has seen a steady increase in the value of stocks in the United States and treading water for the rest of the world. While U.S. Stocks, especially communication and information technology stocks, have performed really well during the past decade, Emerging Markets and the rest of the world have not kept up. Most developed markets hit their bottoms in 2018, though Emerging Markets continued to struggle in 2019 since many of them hit market bottoms and may hit lower bottoms in 2020.
The Coming Decade
No one predicted the performance of global financial markets in 2020 because no one foresaw the impact of Covid on the global economy. Every single prediction of financial markets in 2020 was wrong. Given this, how can we predict what will happen in financial markets during the coming decade?
There will need to be some significant event that will shift investment flows from the United States to the rest of the world for any change in the stock market’s performance in the 2010s to occur in the 2020s. It seems unlikely that we will have a large number of market tops in 2020 or 2021 since the current bull market began in the developed world in 2020. The United States has had a change in political control as a result of the elections of 2020. Stock markets did well in 2020 and are likely to do well in 2021.
The world is still adjusting to ultra-low bond yields on government bonds. Yields are negative in nominal terms in most of Europe and Japan and negative in real terms in the United States, United Kingdom, Canada and Australia. Bond yields continue to fall in many emerging markets.
Our prediction is that the stock market still hasn’t fully incorporated low government bond yields into the market. With little prospect of inflation, there is no reason for bond yields to rise. Instead, bond yields are likely to remain low during the rest of the decade. As long as that is true, there is no reason for the market to collapse into a bear market. We predict another set of bull market peaks before the United States falls into a new bear market.
At some point, however, the winds will shift, and money will start to flow back into Emerging Markets and markets outside of the United States. But currently, there is little evidence that will occur in the near future.