How to define a bull market?
There are a thousand Hamlets in the eyes of a thousand people, and the definition of a bull market in different minds is also different. Generally speaking, a market with a long-term upward trend is a bull market. However, there is no unified view on how long and how much it will increase. In practice, some people think that if the market has an increase of more than 20%, it can be considered a bull market, while others think that the index market can be considered a bull market if it reaches 50%. This book selects the five bull markets of A shares in the history of the history of "the duration is close to or more than one year and the stock index doubles". As the research object, the time periods are 1991-1993, 1999-2001, 2005-2007, 2008-2009, and 2013-2015 (see Table 1).
In terms of the increase and duration, the first round of bull market, the Shanghai Stock Exchange rose by 1353%, lasting for 21.4 months, and the Shenzhen Stock Exchange rose by 723%, lasting for 17.8 months; the other four bull markets rose by 110% (25.3 months), 501% (28.8 months), 103% (9.1 months), and 155% (11.9 months), and in the fifth round of bull market, GEM rose by 571% (30.4 months).
From the distribution of the increase of stocks , except for the small number of stocks in the first bull market and the listing time of most stocks is close to the end of the bull market, most of the stocks in the other four bull markets have doubled, even 2 to 10 times. From the second round to the fifth bull market, the proportion of stocks that doubled were 48%, 89%, 84%, and 89% (main board and SME board)/98% (GEM).
In fact, based on the doubled stock index, there were 8 major bull markets in A-shares. However, given that the market was not mature in the early 1990s, the construction of the stock market system was still in its early stages, and the number of listed companies was limited, and the driving force and characteristics of the previous bull markets were similar. Since the first and second index doubling from 1991 to 1993 are close in time and logically consistent, it can be regarded as two bands in the same bull market, so the author merges them into the first bull market as a sample for detailed analysis. The two index doubled markets in 1994 and 1996 are just briefly introduced to clarify the process and help readers get a glimpse of the leopard. In addition, the Shanghai and Shenzhen stock markets are relatively independent in the first round of bull market. We will review and analyze the market conditions of the two markets respectively; the GEM and the main board markets in the fifth round of bull market (2013-2015), have a large difference, so we have also sorted out the two sectors separately, especially focusing on the switching between growth, small-cap style and value, and large-cap style.
What are the commonalities of the five rounds of bull market in the macro scope?
There is no necessary connection between the five rounds of bull market and single variables such as economy, inflation, liquidity, etc. :
1) The economy has risen twice, down twice, and 1 deep V-reversal. With poor economy, the stock market can also become bullish, such as 1999-2001 and 2013-2015.
2) Inflation rose 1 time, down 3 times, and CPI and PPI differentiated. From 1999 to 2001, 2008 to 2009, and 2013 to 2015, the macro environment was in a process of deflation or towards low inflation, and the market maintained an upward trend.
3) Liquidity has been loosening three times and gradually tightened two times. The tightening of liquidity and the rising discount rate does not mean that the prices of financial assets will inevitably fall. Liquidity tightened from 1991 to 1993, 2005 to 2007, and the market also ushered in a bull market.
However, the market is booming, and the economy is positive and liquidity is loose at least one of them. The basic framework for our judgment of the market is the DDM dividend discount model in securities investment. The price V of a stock is determined by three factors: the numerator represents the economic fundamentals and corporate profits. Specifically, it is composed of capital, ROE, and dividend rate d. The denominator is composed of two parts: risk-free interest rate Rf and risk premium . The risk-free interest rate and market liquidity are in the table. The looser the liquidity, the lower the risk-free interest rate. The risk-premium is determined by the risk evaluation and risk preference. The higher the risk-preferred (the lower the risk compensation required by investors for the same expected returns) the lower the risk premium.
1) When the numerator side weakens (economic and profits decline), if the denominator side falls faster than the numerator side, then asset prices may still rise. For example, from 1999 to 2001, the economic growth rate entered a phased bottom. From 1996 to 1999, the central bank cut interest rates 37 times and lowered the reserve requirement ratio twice. Combined with the Internet boom at that time, the Shanghai Composite Index of Shanghai Composite Index of Shanghai Composite Index of Shanghai Composite Index of Shanghai Composite Index of Shanghai Composite Index of Shanghai Composite Index of Shanghai Composite Index of Shanghai Composite Index of 110% from 2013 to 2015, and the growth rate of GDP fell below 7%, but the "new normal" of the economy was embedded in the hearts of the people. The central bank cut interest rates 5 times and the reserve requirement ratio four times. Coupled with the leverage funding effect, the Shanghai Composite Index rose 155% and the ChiNext Index rose 571%.
2) If liquidity tightens, and the numerator end is strong enough (the economy continues to improve) or there are other hedging (risk preference increases), the capital market may continue to perform well. For example, from 1991 to 1993, the economy was overheated, with four hot, four high, four tight and one chaos. The government took action to control inflation, and the loan interest rate raised interest rates 1 times. The market benefited from the growth dividends brought by reform and opening up, and the risk preference was frequent. The Shanghai Composite Index and Shenzhen Component Index rose by 1353% and 723% respectively; from 2005 to 2007, China's large-scale urbanization and infrastructure real estate stimulus from China to 2005 to 2007. Intensively, combined with the global easing wave of Federal Reserve , the GDP growth rate rose from 11.1% in March 2005 to , , 15.0% in June 2007, and the performance of A-shares changed from negative growth to high growth of more than 50%. Although the central bank raised interest rates eight times and 13 times increased the reserve ratio of , and at the same time, the issuance of central bills and other means of recycling currencies, the Shanghai Composite Index still rose by 501%, driven by strong fundamentals.
3) When the numerator and denominator resonate better (economic upwards, liquidity is loose), the market often performs well. For example, from 2008 to 2009, US subprime mortgage crisis caused a sharp drop in global total demand, and the country fell into a deflation. The government launched the "Four trillion" plan, the central bank cut the reserve requirement ratio four times and five times. China's economy reversed deeply, the upward economy resonated with liquidity easing, and the Shanghai Composite Index still rose 103% in the context of global financial crisis .
When economy or liquidity becomes the main driving force of the bull market, the turning point events of the two driving forces often become important catalysts for the market to reach its peak.
1) When the bull market peaked from 1991 to 1993, 2005 to 2007, and 2008 to 2009, the economy was in stagflation after overheating, slowing growth and high inflation. The continuous tightening of macro-control policies in has become an important reason for the end of the bull market.
2) The bull market from 1999 to 2001, 2013 to 2015 was mainly driven by liquidity and loose market environment, and the themes of asset restructuring and technology were hot. When the market gradually peaked, strict regulatory policies became the main reason for the end of the bull market. The end of the bull market from 1999 to 2001 was due to the company's stock price manipulation or financial fraud and the China Securities Regulatory Commission strengthened the suppression of stock price manipulation and financial fraud. The bull market from 2013 to 2015 ended the China Securities Regulatory Commission to strictly investigate off-market capital allocation, resulting in the bursting of the leverage bull bubble.
3) It should be added that bull markets will end. The reason for the bull market is not single or purely exogenous. The bull market itself fosters the gene of self-end, just as Howard Max said in "Cycle" "Sometimes the market falls due to its own gravity too much." Our analysis of the reasons why the bull market falls from its peak is more of a "catalyst" rather than an essential force. For example, the bubble of the leveraged bull burst in 2015 is essentially because the power of the bull market has reached its end, the microstructure of the market deteriorates, and the pendulum of the cycle has reached its extreme, and it will naturally swing back to the midpoint. Checking off-market capital allocation is just the "last straw that overwhelms camels" and is not the main reason to end the bull market. On the contrary, standardized behaviors such as financial fraud, stock price manipulation, and illegal capital allocation are important institutional guarantees for maintaining the healthy operation of the market and investors obtain reasonable returns.
This article is excerpted from the book "A Brief History of the Bull Market: The Operational Logic of Five Big Bull Markets in A-shares" written by Wang Delun, managing director of Industrial Securities and chief economist of Xingzheng Asset Management.
