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A record recovery and bull run

As of October 2019, the U.S. economy has been growing for 126 months, the longest expansion since the mid-19th century.

During the same period, the S&P 500 Index has sustained the longest bull market on record. The length of these two runs has heightened investors’ anxiety that surely the good times must end soon.

Bear markets are a normal part of the market cycle. This leads to two important and related points:

  1. Bear markets are difficult to time.
  2. Because of that, we favor planning for an eventual downturn. This can help investors avoid a fear-based reaction that can work against their long-term financial goals.

Scroll down for highlights of what this means and how investors can prepare. Or click to download the full report PDF.

Bull vs. Bear

Bull market

A prolonged trend of rising equity prices without a decline of 20% or more

Bear market

A decline of 20% or more from the highest closing price to the lowest


A significant decline in economic activity (gross domestic product) that lasts for more than a few months

What should investors consider now?

Our strategists share insights into the opportunities that can appear late in a bull market.

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Traits of a bull-market peak

During the latter stages of a bull market, investor overconfidence can lead to inflated market prices and, as in some recent cases, excessively high asset prices. The table below lists common factors that can lead to excesses over time.

Factor Currently indicating a peak? What we are seeing today
Heavy inflows into equity mutual funds No Equity mutual funds have seen persistent outflows in the past year
Rising real (inflation-adjusted) interest rates No Real U.S. interest rates are declining
Credit spreads widen sharply No Credit spreads remain contained
Exuberant investor sentiment No Sentiment shows some caution
Rapid growth in corporate mergers and acquisitions Yes Merger and acquisition activity has been rising since 2016
IPO activity is strong* Yes IPO issues have more than doubled from 2018 to 2019
Decelerating corporate earnings Yes Positive but slower earnings growth
Equity market leadership shifts to defensive sectors Yes In the past 12 months, the leading sectors have been Utilities, Consumer Staples, and Communication Services. The worst performers have been Energy, Materials, and Financials.
Sources: Wells Fargo Investment Institute, September 30, 2019.
* An IPO is an initial public offering of equity by a company.

Risk factors for a potential downturn

Recessions are not easy to predict, but we believe the specific headwinds of this cycle may provide investors with warning signs to monitor.

  • 1

    Yield-curve inversion

    In 2019, rapidly growing investor demand for longer-term bonds drove their yields lower than those of some shorter-term bonds. This is a yield-curve inversion, and it can push the rates that banks earn on long-term loans lower than the short-term rates that they pay on deposits. In this way, the inversion undercuts bank profits and reinforces the pressure on the economy. Yield-curve inversions are often one of the more predictive indicators of recessions.

  • 2

    U.S. and international political disruption

    Geopolitical uncertainties—such as the U.S. and China trade dispute, the growing U.S. political divide, Brexit, and tensions in the Middle East and North Korea—may disrupt the global economy. Sustained geopolitical uncertainty could continue to dampen sentiment, potentially triggering a sustained economic downturn.

  • 3

    High-yield corporate debt spreads

    Increasingly higher yields for non-investment-grade bonds relative to U.S. Treasury securities of comparable maturities may signal stress for lower-quality debt. Currently, only a few sectors of the high-yield corporate market—particularly the Energy sector—are experiencing these higher spreads.

  • 4

    Debt levels

    During this expansion, absolute debt levels have risen, yet signs of stress are not evident at this time. Household debt/GDP ratios remain elevated compared with historical levels but are lower than they were before the Great Recession.

  • 5

    Federal Reserve (Fed) policy

    We see a significant risk for two potential policy mistakes. First, the Fed may fail to cut interest rates sufficiently for a slowing economy that faces heightened political uncertainty. Second, there is a risk that the Fed exhausts effective monetary tools to fight the next recession.

  • 6

    The Conference Board Leading Economic Index® (LEI)

    This index of 10 market and economic indicators can be used as a barometer of early signals of slowing growth. The LEI is slowing, as it did twice earlier in this expansion (in 2012-2013 and 2016). However, during those earlier slowdowns, the headwinds were less concerning to us than they are today. This suggests the risk of a recession is rising, along with the potential for a bear market over the next 12 to 24 months.

Why this cycle is different

While the current recovery is the longest on record, the average pace of growth during this recovery has been 2.3%—significantly lower than the 4.0% average gross domestic product (GDP) growth rate the U.S. experienced during the past six recoveries.

Please find the accessible version of the information shown in this chart or graph at the link below.

Chart: Comparison of six previous economic recoveries

  • 1971 to 1973
    Length of economic expansion (number of quarters): 10
    Cumulative GDP growth: 15.6%
  • 1980 to 1981
    Length of economic expansion (number of quarters): 2
    Cumulative GDP growth: 3.9%
  • 1982 to 1990
    Length of economic expansion (number of quarters): 31
    Cumulative GDP growth: 38.1%
  • 1991 to 2000
    Length of economic expansion (number of quarters): 39
    Cumulative GDP growth: 43.1%
  • 2001 to 2007
    Length of economic expansion (number of quarters): 25
    Cumulative GDP growth: 19.0%
  • Current recovery, 2009–
    Length of economic expansion (number of quarters): 40
    Cumulative GDP growth: 25.7%
Sources: Bloomberg, U.S. Bureau of Economic Analysis, National Bureau of Economic Research, Wells Fargo Investment Institute, as of June 30, 2019

We currently see a number of factors serving to push markets and the economy ahead, as well as factors serving to hold them back.


  • Weaker manufacturing
    Job creation slowing
    Mixed housing market
    Softening business confidence
    Political uncertainties
    Trade disputes
    Slowing international economies


  • Positive (but slowing) corporate earnings
    Wage growth outpacing inflation
    Low interest rates
    Steady household spending growth
    Accommodative Fed policy
    Chinese stimulus
A man and a woman look at a computer together considering their investments.

Four ways investors can position portfolios for the next downturn

For more insights, including growth-oriented strategies and considerations for those nearing retirement, download the full report.

  • Diversify to help mitigate risks.

    Diversification can allow investors to participate in late-cycle upswings and mitigate global market volatility. Consider broadening exposure to alternative investments, including hedge funds and private capital.*

  • Manage cash during periods of volatility.

    Instead of holding large quantities of cash, deploy it selectively as markets pull back.

  • Rebalance regularly.

    This long economic expansion may have created a much higher equity exposure than originally desired in many portfolios. Rebalancing back to strategic targets can help prepare a portfolio for a market correction or economic downturn.

  • Know what you own.

    Investor sentiment can outpace fundamental value late in a cycle. If expected returns look too good to be true, they probably are. Know what you own also means accounting for overlapping exposures or concentration risk. For example, some growth-oriented equity funds were not as diversified as they seemed in the late 1990s because growth-oriented equities as a group became overvalued.

* Alternative investments, such as hedge funds and private capital are not suitable for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.

Find more in the full report

The full “How Bull Markets End” report from Wells Fargo Investment Institute includes:

  • Additional specific strategies for
    • Investors nearing retirement
    • Growth-oriented investors
  • More details of warning signs that suggest a bull market top may be near
  • A look at managing stocks through market volatility

For additional insights and market commentary, visit our website. For assistance with your investment planning or to discuss the points in this report, please talk to your investment professional.

Follow us on Twitter at @WFInvesting.

View the full report (PDF)

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