What Kills Bull Markets

We don’t think this record run is over yet— but we’re watching these signs.

- RYAN ERMEY

THE CURRENT BULL MARKET IS the longest in history, but it has had some scrapes along the way. Some, such as the August 2015 “flash crash” in exchange-traded funds, were mere flesh wounds. Others, such as the late-2018 sell-off driven by concerns over rising interest rates and a U.S. trade war with China, drew serious blood. Standard & Poor’s 500-stock index slid 19.3%—just a hair above bear-market territory (generally defined as a 20% decline from a market’s peak).

“If it bleeds, we can kill it,” Arnold Schwarzenegger once noted. Okay, that’s not accepted Wall Street wisdom, it's a line from the movie Predator, but the point stands. The bull market is mortal. Just because it has survived every challenge to date doesn’t mean that investors shouldn’t keep an eye on where things stand compared with conditions that have led to the demise of bulls past. Overall, the bull doesn’t appear to be in immediate danger, but the following factors are worth watching.

THE ECONOMY

“Bull markets don’t die of old age. They die from fright,” says Sam Stovall, chief investment strategist at research firm CFRA. What investors fear is recession—a prolonged period of negative economic growth. About two-thirds of bear markets occur alongside recessions, with the market peak tending to precede the recession by six to nine months. Because consumer spending accounts for some 70% of U.S. economic growth, negative trends for consumers signal trouble, says Stovall. Consumer confidence tends to post year-over-year declines in the run-up to recession; housing starts have logged a double-digit decline from the previous year’s levels within three months of every recession since 1960.