While updating a video on our website, an article was posted on a public site I frequent about Bull and Bear markets that provides a different perspective. Here is a link to the article which is summarized below: A Perspective on Secular Bull and Bear Markets.
“Was the March 2009 low the end of a secular bear market and the beginning of a secular bull? At this point, over ten years later, the S&P 500 has set a series of inflation-adjusted record highs based on monthly averages of daily closes.
Let's examine the past to broaden our understanding of the range of historical trends in market performance. An obvious feature of this inflation-adjusted series is the pattern of long-term alternations between uptrends and downtrends. Market historians call these "secular" bull and bear markets from the Latin word saeculum "long period of time" (in contrast to aeternus "eternal" — the type of bull market we fantasize about).
The key word on the chart above is secular. The implicit rule we're following is that blue shows secular trends that lead to new all-time real highs. Periods in between are secular bear markets, regardless of their cyclical rallies. For example, the rally from 1932 to 1937, despite its strength, remains a cycle in a secular bear market. At its peak in 1937, the index was 29% below the real all-time high of 1929. For a scholarly study of secular bear markets, which highlights the same key turning points, see Russell Napier's Anatomy of the Bear: Lessons from Wall Street's Four Great Bottoms.
An alternate view of secular trends is offered by Ed Easterling of Crestmont Research. See his fascinating study Understanding Secular Stock Market Cycles, which makes a persuasive case that we remain in a bear market that began in 2000. The underlying principle, in Easterling's view, is the price/earnings ratio, which remains lofty.
If we study the data underlying the chart, we can extract a number of interesting facts about these secular patterns (note that the table below includes the 1932-1937 rally):
Since that first trough in 1877 to the March 2009 low:
- Secular bull gains totaled 2075% for an average of 415%.
- Secular bear losses totaled -329% for an average of -65%.
- Secular bull years total 80 versus 52 for the bears, a 60:40 ratio.
This last bullet probably comes as a surprise to many people. The finance industry and media have conditioned us to view every dip as a buying opportunity. If we realize that bear markets have accounted for about 40% of the highlighted time frame, we can better understand the two massive selloffs of the 21st century.
This line is a "best fit" that essentially divides the monthly values so that the total distance of the data points above the line equals the total distance below the line.
The chart below creates a channel for the S&P Composite. The two dotted lines have the same slope as the regression, as calculated in Excel, with the top of the channel based on the peak of the Tech Bubble and the low is based on the 1932 trough.
Historically, regression to trend often means overshooting to the other side. The latest monthly average of daily closes is 117% above trend.
Will the March 2009 bottom be different? Perhaps. But only time will tell.
Note that in the charts above, we've color-coded the rally since the 2009 low in blue, implying the start of a secular bull. We did so because, in December of 2011, the real price achieved a new all-time high. But based on the underlying market valuation, one can make a strong case that the secular bear market hasn't ended. For a persuasive argument along those lines, see Ed Easterling's Are We There Yet? Secular Stock Market Cycle Status (PDF format) and/or contact Bob Bronson of Bronson Capital Markets Research.”
The charts and commentary in this article confirm our view that it is late in the cycle and therefore prudent to remain cautious. As always, please call us with questions or comments.
Until next time, Cheers,
Jim