Global Financial Data’s
Market Tops and Bottoms Indicators for 2023
Bryan Taylor, Chief Economist
Global Financial Data tracks bull and bear markets in over 100 stock markets. GFD has over 400 years of data to analyze when bull and bear markets have begun and ended and the number of market tops and bottoms that have occurred each year worldwide. GFD defines a bear market as a 20% decline in the primary market index for each country and a bull market as a 50% increase in the primary market index. A market bottom occurs when the index declines by 20% or more after a 50% increase, and a market top occurs when the market rises by 50% or hits a new high after a 20% decline.
Global Bulls and Bears
Bear markets occur more quickly than bull markets and over a shorter period of time with higher daily volatility, so their occurrence is quickly noted. However, it may take several years for a market to make the 50% recovery that signifies a bull market, and it is only then that analysts realize that investors are benefiting from a new bull market. Otherwise, a market might decline by 25%, rise by 30%, then decline again by another 25% producing one long bear market and not a series of bear markets.
This is what made the 1929-1933 bear market crash in the US or the decline in Japan’s stock market between 1989 and 2012 so memorable. There was a decline, recovery, another decline, and another recovery for years. Investors would expect that as the market bounced back the bear was gone, but the bear only reappeared and drove prices further down, ultimately declining by almost 90% in the US. There were a significant number of bear markets in 2022, but are these bear markets over with, or will they continue into 2023?
The strength of the market bottom globally depends upon the number of markets that hit a bottom and begin to bounce back. Global markets are integrated, and bear markets often occur across global markets simultaneously. This was seen in the Covid bear market of 2020. Global markets bottomed out within days of each other, started to rebound, and then made a historic rise! 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 provide comfort to worried investors that a new bull market has begun.
Figure 1 shows the number of market tops minus the number of market bottoms in each year since 1900. More market tops show the end of a bull market, and more market bottoms show the end of a bear market. The market tops in 1920, 1929, 1937, 1969, 1973, etc. are clearly visible, as are the market bottoms in 1921, 1932, 1940, 1974, 1982 etc. There were fewer market tops and bottoms in the 1950s and 1960 as the bull market roared ahead.
Figure 1. GFD Total Market Tops Minus Market Bottoms, 1900 to 2022
The number of tops and bottoms expanded in the 1990s when many emerging and former communist countries opened stock markets increasing the number of global markets. After the market peaked in 2000, it took three years of bear market bottoms for global markets to start moving forward again. The largest number of bull market peaks in history was in 2007, followed by the largest number of bear market bottoms; however, the number of market bottoms in 2020 when Covid struck exceeded the number of bear market bottoms in 2009. This shows that the degree of integration of global equity markets has increased over time. When a global pandemic hit, the world’s global economies were all influenced by one another with great impact. We are a global market today. Figure 2 shows GFD’s World Index’s market declines in 2000, 2008, 2020 and 2022.
Figure 2. GFD Indices Developed World Index, 1995-2022
Between 2009 and 2020, the U.S. Stock market rose dramatically while other global stock markets treaded water. While U.S. Stocks, especially communication and information technology stocks, did well during the past decade, Emerging Markets and much of Europe failed to exceed their 2008 highs. This is reflected in the up and down uncertainty of market tops and bottoms. There were three net tops in the world’s stock markets during the past decade in 2015, 2018 and 2021 and market bottoms in 2012, 2016 and 2020.
The Covid Influence
When Covid struck, it led to the largest number of bear market bottoms in the past 100 years. Although some stock markets had hit their bull market peaks in 2018, most other markets topped out in early 2020. In 2020, 84 stock markets suffered bear markets and hit their bottom, almost all in March 2020, before beginning a new bull market. The Covid bear market was both the most coordinated global bear market, and the shortest bear in history, lasting only two months in some countries. Figure 3 shows the 50% declines in 2000 and 2008 and the 25% declines in 2020 and 2022 in the GFD USA Top 100 Index.
Figure 3. GFD Indices, USA Top 100, 1995-2022
2022 had many bear markets. Typically, there are about five to ten years between global market bottoms, but it has been only two years since the last major global bottom in 2020. The shortest global bear market in history was followed by one of the shortest global bull markets in history. During 2022, inflation reached levels that hadn’t been seen since the 1980s. When Covid hit in 2020, many governments pumped up their markets and labor shortages appeared as people changed jobs or were laid off. As Figure 4 shows, unemployment in the United States skyrocketed in 2020, then fell back to 3.5% by 2022.
Figure 4. United States Unemployment Rate, 2002-2022
As the world continues to struggle with the ramifications of Covid, labor shortages pushed unemployment down to unprecedented levels, the cost of labor continues to rise, which puts pressure on inflation. During the early stages of the pandemic many persons were removed from labor markets due to the closure of many businesses only to never return. Unemployment is now at low levels due to a great market rather than to other conditions.
Ukraine and Inflation
Inflation rose as a result of the invasion of Ukraine by Russia, which created shortages in many commodities and raised the price of raw materials. A perfect storm had been created. Governments held back raising interest rates during the pandemic and during times of unemployment; however, with the U.S. and others aiding with the Ukraine defending itself from Russia, this led to more Government spending. As Figure 5 shows, inflation rose to levels that had not occurred since 1982.
Figure 5. United States Consumer Price Index Inflation Rate, 1960-2022
Once inflation became a reality, central banks realized they had to fight the first real bout of global inflation in forty years. Instead of pushing interest rates down to zero, or less, central banks raised interest rates to levels that hadn’t been seen in over a decade. This is seen in Figure 6 which shows that the yield on the 10-year Government Bond returned to levels it had been at in 2008.
Figure 6. United States 10-year Government Bond Yield, 2002-2012
Consequently, all financial assets paid the price. Stocks, bonds, crypto, commodities all began to decline in price as investors feared a global recession would result from the global raising of short- and long-term interest rates. The days of negative interest rates were over for good.
Figure 7. United States Stock Market Capitalization as a Share of GDP, 1980-2022
Markets were overvalued at the end of 2021. As Figure 7 shows, the US stock market’s capitalization was over twice the country’s GDP in December 2021, a ratio that had never been achieved before. The S&P 500 topped out on January 3, 2022, and by October 12, 2022, had declined by 25%. The bear markets in 2022 were not as precipitous or globally coordinated as in 2020, but nevertheless, 56 markets suffered bear markets in 2022. 2009 and 2020 were the only other years in this century that endured more bear markets in a year.
Market Outlook
At the end of 2021, it looked like only 2 global markets had hit a market top, but by the end of 2022, the number of market tops in 2021 had increased to 25 with 31 market tops occurring in 2022. The declines were not as coordinated as the 2020 bear market. It turned out that almost half of the markets had already topped out in 2021 and we are still not sure if October will be the final bottom of this bear market or if further declines will occur in 2023. How many of the 56 markets that went through bear markets in 2022 will continue into 2023?
While the bear markets of 2000 and 2008 were driven in large part by stock market bubbles that led to 50% declines, the past two bear markets were driven by external events, the Covid pandemic, inflation and the Russian invasion of Ukraine. For this reason, the bear markets in 2020 and 2022 were not as severe as the bear markets of 2000 and 2008.
It seems unlikely that interest rates will return to the real or nominal negative levels that prevailed in Europe in the 2010s. Interest rates fell steadily between 1981 and 2021 but may have hit their secular lows and may be higher for the rest of the decade. When bull markets return, instead of benefitting from declining interest rates, as was true during the past forty years, the stock market will be fighting against the headwinds of higher interest rates.
A year from now we will know how vicious this bear market was, how many of the 56 markets that were in a bear market in 2022 continued to decline into 2023, and we will probably be in a new bull market, but whatever happens, the decade of the 2020s will be truly different from the decade that preceded it. We may also see that many who chose in 2020 or 2021 to withdraw from the labor force will choose to return to it, due to the increase in cost of living and the cost of goods. Every part of the world has seen a large increases in the price of food, housing, and energy. This is a new world.
If you would like to examine any of the data I have used in this article for your own reference please contact me and I will provide it to you.
