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The Bull Run: Many Happy Returns?

By Sam Stovall The current bull market just celebrated its third birthday. Back on Oct. 9, 2002, the Standard & Poor's 500-stock index posted a closing low of 776.76, which eventually marked the end to the bear market that began back in March, 2000, and erased 49% of its value. (S&P defines a bull market as an advance of at least 20% from the low set during the prior bear market.)

Since 1942, bull markets have lasted an average 56 months, or 4.5 years. From Oct. 10, 2004, through Oct. 7, 2005, the S&P 500 advanced 6.6%, which begs the question: Is this year's performance strong or weak?

During the first 12 months of a new bull market, the S&P 500 posted an average increase of 38%. Possibly of greater interest is that none of the industries in the S&P 500 posted an average decline during first-year bulls from 1968 to 2003. This phenomenon probably contributed to the genesis of the old Wall Street adage that a rising tide lifts all boats.

Second-year bull markets have also been pretty good to investors, since the S&P 500 rose an average 12% and recorded no declines.

A SECOND WIND? Third-year bull markets have been the most challenging for investors, in our view. In the past 60 years, the average price advance was only 3% during the third year of a bull market.

More important, however, was that six of the third-year performances were disappointments: One year the S&P 500 posted no change, while five times the market declined. And of those five declines, three became official bear markets shortly after. Therefore, since the S&P 500 gained 6.6% during this third year, vs. the 3% average, it looks like this was a pretty good performance.

History indicates that if the S&P 500 celebrates a third birthday without a decline, chances are very good that it will live to see its fourth birthday -- and even experience a growth spurt. There's no guarantee that history will repeat itself, but of the six surviving bull markets since 1942, the average fourth-year advance was 14% with only one decline -- which was less than 3%.

Source: Standard & Poor's

And what of sector performances? The table below highlights the performances of industries in the S&P 500 averaged to the sector level during the fourth year of bull markets since 1960, showing the average frequency that the underlying industries beat the S&P 500, their average price change (excluding dividends) during all periods, and during each of the five periods examined.

Source: Standard & Poor's

What we notice from the table above is that even though the S&P 500 advanced during a bull market's fourth year, investors played it safe and gravitated toward the defensive segments of the market. Consumer Staples and Health Care posted above-average price advances, as well as superior frequencies of outperformance. Technology issues also racked up a string of positive moves. This pronounced leadership, in our opinion, reflected investors' concerns surrounding the prospects of a slowing economy as a result of the Federal Reserve's likely rate-tightening program to thwart the threat of rising inflation.

Yet even during a resulting slower-growth period for the U.S. economy, we think investors believed that demand for the basics -- such as food, beverages, and medical care -- would remain fairly static, and the need for productivity-enhancing tools would also be favored by management.

The underperforming areas of the market -- energy, financials, materials, and utilities -- probably experienced attempted profit taking after having performed well as economic demand rose, or saw margins squeezed by a flattening yield curve as a result of the Fed's rate increases.

BUSINESS AT THE WHEEL. So what does S&P see for the coming year? The overall U.S. economy is projected to recover from the recent spike in oil prices brought on by Hurricanes Katrina and Rita as we head into 2006. And while the consumer is expected to continue supporting the economy's growth next year, business spending is seen as the main driver.

Inflation is projected to decline (after peaking in the 2005 fourth quarter) as oil prices are seen moderating. S&P expects crude oil prices to close 2005 at $65 per barrel and edge toward $54 by yearend 2006. Corporate earnings are projected to advance in the coming quarters, but at a decelerating rate.

S&P's Investment Policy Committee believes the S&P 500 will remain in bull-market mode into 2006, posting an increase of 5.1%, following a projected increase of 4.8% during 2005.

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of October 7, 2005.


Construction Materials

Diversified Metals & Mining

Fertilizers & Agricultural Chemicals

Health Care Distributors

Health Care Services


Managed Health Care

Oil & Gas Drilling

Oil & Gas Exploration & Production

Oil & Gas Refining & Marketing


Water Utilities


S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.

S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:










Above Average


In Reorganization




Not Ranked


Below Average

S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.

S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.

S&P 12 Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.

Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC- London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo.

Required Disclosures

In the U.S.

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.2% of issuers with buy recommendations, 57.5% with hold recommendations and 12.3% with sell recommendations.

In Europe

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.4% of issuers with buy recommendations, 46.8% with hold recommendations and 18.8% with sell recommendations.

In Asia

As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 33.3% of issuers with buy recommendations, 47.2% with hold recommendations and 19.5% with sell recommendations.


As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.4% with hold recommendations and 13.6% with sell recommendations.

5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.

For All Regions:

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, NY, NY.

Other Disclosures

This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").

The research and analytical services performed by SPIAS, S&P LLC and S&P AB are each conducted separately from any other analytical activity of Standard & Poor's.


This material is based upon information that Standard & Poor's considers to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute Standard & Poor's judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

For residents of the U.K.: This report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, respectively.

Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations.

Stovall is chief investment strategist for Standard & Poor's

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