Over the past 15 years, my partner Cory and I have had countless discussions about whether the present secular bear-that began off the tech wreck peak in 2000–was likely to take 3 or 4 cyclical bottoms before grinding equity valuations to the final generational buying opportunity that has marked the end of every prior secular bear in history. The first cyclical low was in 2001-03 and the second in 2007-09.
When the 2009 cyclical recovery began in a sudden and rapid “V” formation, beginning from just fair value rather than deeply discounted values, we knew this suggested at least one more test of the prior cyclical low was likely for equity indices within 3 to 5 years. Whether it would take a fourth decline after that remained to be seen, and depended on how much cleansing of the financial system was allowed to run its free-market course.
As it turned out, the cleansing was only skin deep, before bank-serving policy makers unleashed relentless programs to paper over management mistakes and prop asset prices quickly higher again. As a result, since 2011 it has become more and more probable that the next cyclical decline was going to be another whopping -50%+ style bear for the history books.
While no one but a time traveler from the future can actually know when and whether this 3rd cyclical decline will prove the final plunge of this secular period, charts like the one below make me realize that the next mean reversion (amid central banks out of monetary bullets) may indeed be the last needed to finally crush reckless animal spirits and valuations to that much awaited generational-low buying opportunity.
The below picture captures the price moves of the S&P 500 ( blue) since ‘irrational exuberance’ began in 1995. The orange line captures the highs and lows of margin use (borrowing to speculate) throughout. The green circles mark the 2 lower low cyclical bottoms that have so far presented in the past 15 years. The next green circle to be drawn is likely to present uncommon opportunity for those set up to capitalize on the third, and possibly final, cyclical decline of this secular bear…