How The Current Stock Rally Stacks Up to History's Longest Bull Markets

The Dow has tripled in value over an eight-year period for the fifth time ever

Senior Quantitative Analyst
Mar 8, 2017 at 7:00 AM
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It was almost eight years ago exactly that stocks hit their lowest point of the financial crisis. Since then, stocks have more than tripled, with the S&P 500 Index (SPX) and the Dow Jones Industrial Average (DJIA) each showing an annualized return of more than 16%. It made me wonder if there were similarly large and sustained rallies in the past and, if so, how long they lasted. We know the good times never last forever, but do they tend to end with a bang?

Dow Rallies: We have Dow data going back to before 1900. This is the fifth time that the index tripled over an eight-year time frame. The chart below shows the eight-year rallies (this is seen from year zero to year eight on the chart) and then the subsequent five years (years eight through 13).

The recent rally was the strongest of them all through the first six years, as the Dow climbed about 170% while none of the other rallies had even reached 100% by that time. However, that's where the recent rally began to stall and the other rallies began to take off. At year eight, the rallies all meet around the 200% mark, which represents about 15% annualized return over eight years. This is not a mere coincidence, as this is what I defined as a signal (15% annualized return over eight years).

So what happened going forward? The last rally before this one occurred from 1988 into 1996. That rally stayed hot for another two and a half years before petering out at the height of the tech bubble right around the year 2000. In that instance, there were a lot of gains to be made still. In the two occurrences before that one, the rally was at its tail end and buyers at that time saw no gains for the next couple of years. One of those rallies, from 1979 into 1987, ended abruptly on Black Monday (Oct. 19, 1987, when the Dow fell more than 20% in one day).

Finally, we get to the first such rally that occurred. The rally was from 1920 through 1928. There were big gains still to be had for just the next several months. After that, though, the most infamous stock market crash in history happened. The Great Depression decimated stocks, giving back all the gains seen during the rally and then some.

Dow bull markets march 7

Below is a table showing data on the rallies I mentioned above. I show the annualized returns going forward after each of them. For some context, the annualized return since 1920 is about 5.5%, so that is what I would consider typical. After three of the four rallies, the Dow failed to reach that over the next two years. Looking out over the longer term, the rally that ended in 1996 saw a strong return over the next five years with an annualized return of 9.23%. Two of the rallies were very close to that 5.5% level which I consider a typical return. And finally, there was the one catastrophic annualized return of negative 18.33% during the Great Depression. In conclusion, over the next few years the market could be pretty good, typical, or very bad. You're welcome.

Dow returns after bull market march 7

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