Where are we in the share market cycle?

Keep dancing but know where the exit is.

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Understanding where we stand in the share market cycle is crucial for making smart investment decisions.

Sir John Templeton's quote below perfectly captures how investor emotions influence the market's ups and downs. He famously said:

Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria.

Similarly, Warren Buffett advises to be greedy when others are fearful and the vice versa, emphasising the importance of reading market expectations and participants' emotions.

In this article, I'll use Howard Marks' market cycle concept to determine where we might be in the share market right now. I'll also examine what other famous investors are saying and positioning for the cycle.

Second year of the bull market

Howard Marks, co-founder of Oaktree Capital Management, uses several key indicators to understand the market cycle. These include investor sentiment, valuation levels, credit availability, risk appetite of investors, and market behaviour.

To sum up, in his bestselling book Mastering the market cycle, he says opportunities for investment gains improve when:

  • The economy and company profits are more likely to swing upward than down
  • Investor psychology is sober rather than buoyant
  • Investors are conscious of risk or — even better — overly concerned about risk
  • Market prices haven't moved too high.

Based on these factors, it's safe to say that we are no longer in a bear market, with the overall market sentiment being positive. So if we're not in a bear market, where exactly are we in the share market cycle?

Ken Fisher, Fisher Investments' founder and a son of respected investor Philip Fisher, sees further upside in the US stock markets from here. In June, he said:

Once a market that's had a bear market has hit a bottom and gotten to become a one-year old, it almost always gets to be a two years old. We're in that second year now from the bottom in October 2022.

Another useful sentiment indicator is the VIX index (INDEXCBOE: VIX). Nicknamed the 'fear gauge,' the VIX Index measures how much the S&P 500 Index (SP: .INX) is expected to fluctuate over the next month.

A high VIX indicates anticipated market changes due to uncertainty or fear, while a low VIX suggests stable conditions.

The VIX index has ranged from 10 to 79 and is currently at 13.33, implying some investor optimism. For context, the VIX index hit 65.5 at the peak of the COVID-19 pandemic in March 2020.

What does this all mean to investors?

While we wouldn't encourage anyone to dramatically change their share portfolios based on the market outlook alone, it's worth noting that some market sectors may be starting to look expensive.

Fisher suggests growth stocks tend to do better in the early bull cycle, and high-quality value stocks — such as energy shares or luxuries — outperform in the later part of the upcycle and into a downcycle. His latest trading history appears to confirm that he's expecting this bull market to continue.

According to the May 2024 filing to the US Securities and Exchange Commission (SEC), Fisher Asset Management's top holdings were dominated by 'big tech' shares like Microsoft Corp (NASDAQ: MSFT), Apple Inc (NASDAQ: AAPL), and Nvidia Corp (NASDAQ: NVDA) as of the end of March 2024.

It's worth noting that the fund didn't actively add to these positions, however. The fund also has positions in other value shares, including energy stocks.

This is similar to Warren Buffett's Berkshire Hathaway Inc (NYSE: BRK.B), which has also built a fairly large position in energy stocks, including Chevron Corp (NYSE: CVX) and Occidental Petroleum Corp (NYSE: OXY).

In conclusion, some investors believe we haven't yet reached the 'euphoria' phase. So, keep dancing, but always know where the exit is if the music suddenly stops.

Motley Fool contributor Kate Lee has positions in Microsoft, Nvidia, and Occidental Petroleum. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, Berkshire Hathaway, Chevron, Microsoft, and Nvidia. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Occidental Petroleum and has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Apple, Berkshire Hathaway, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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