After a 5-year bull run comes what?

By Dian Vujovich

The stock market has been on a tear. But with a five-year bull run in tow it may be time for a reversal of fortunes. Then again…

I left the brokerage business as a stockbroker not long after Wall Street celebrated a 5-year birthday party for the market’s bull run performance. That was in 1987. The b-day party happened shortly before the Black Monday market crash in October of that year.

While the idea of even considering a birthday party for the stock market was utterly absurd to me—birthday parties are for people. not stocks, right? Anyway, I figured that the October crash, that resulted in the DJIA losing more than 22 percent of its value and the S&P over 20 percent, was going to be followed by a long-term market downturn similar to the one that happened after the crash that began in 1929. It did take, after all, until the early 1950s for the market to reach the highs enjoyed some 23-ish years before.

But, I was wrong. According to market historians, by September of 1989  all the value that had been lost two years before had been regained. So much for my projections.

I mention this only because there have been big “Yipee’s” as those who write and report about Wall Street have been talking about a 5-year bull run in stocks. And  on Friday, both the DJIA and the S&P 500 did close at five-year highs.

Five years is a fair amount of time for a bull to run. Historically, however, once the bull succumbs what follows is typically a recession and/or market crash.

From Bob Brinker’s Educated Investor online site: “There are several well-known bulls and bears in American history. The longest-lived bull market in US history is the one that began about 1991 and ran into 2000. Other major bulls occurred in the 1920s, the 1950s, the late 1960s, the mid-1980s, and the mid-2000s. However, they all ended in recessions or market crashes.”

During this century, Brinker writes that our bear markets have lasted about two years in length—roughly the same amount of time as the crash that began in 1987 and ended in 1989 did.  The bear market that began in 2000 ended in 2002 and another ran from 2007 to 2009.

Back to our 1987 crash and the cause for it. Aside from too much rose-colored glasses thinking going on coupled with parties for inanimate things, most pros conclude that a number of things contributed to the market collapse.

George Mason University’s History News Network complied six reasons that contributed to the 1987 crash: Derivatives, computer trading, illiquidity, U.S. trade and budget deficits,  overvaluation, and investing in bonds rather stocks for yield.

From what I can see, all of those issues still remain challenges in our economy. Add to that a couple of missing elements—like our ongoing recession,  a growing number of individuals living in poverty and/or unable to find a living wage income, the world economies,  the high costs of an aging population. etc.—and I’m thinking a market correction  can’t be far away.

Whether I’m right or wrong isn’t what’s important here. Nope, the value is in the education and knowing that while the market’s long-term trend line has always been an upward one, there have always been peaks and valleys long the way. Invest accordingly.