With the practically unanimous bullish sentiment today (not that most commentators are saying the economy is good, but most are betting bullish anyway with explanations that “they have no choice” or low yields are forcing them to strap on risk, their clients can’t wait etc. The following long-term chart of the Dow Jones Industrial Average serves as a good reminder of the length and breadth of secular bear periods including our own. It also shows us why present euphoria about the US markets now revisiting their 2007 peak (5 long years of a wild ride to no where), may end up being just one more cyclical swan song in 15 to 20 years of financial carnage.
Source: J.P. Morgan Guide to the Markets
Unless maybe this time is different and global markets have now completed this secular bear that began in 2000 in record time, ending at record highs in price and bullish sentiment. You know maybe the perma-bulls are right. With price multiples historically stretched (Shiller PE above 21), anemic yields that don’t even pretend to compensate for capital risk, levered players the most bullishly bet since 2007, fear (the VIX) collapsing, investors intelligence survey counting twice as many bulls as bears, ever-optimistic equity analysts now predicting S&P earnings growth of 12% in 2013 (notwithstanding that 90% of the 2012 S&P 500 earnings growth came from just 10 companies while the rest struggled!), while leading indicators like the US ISM orders and ECRI index all continue to signal a weakening economy, and this before the minimum 1.5% US GDP loss that the recent tax hikes and minimal spending cuts in March will bring.
It’s true, what could possibly go wrong here?