My recent article picked up by Seeking Alpha, S&P 500: generational opportunity in the making, sparked a flurry of reader comments some of which underlined just how little is understood about the cause and progress of secular bears. For those seeking more education and understanding, I highly recommend some time on Ed Easterling’s excellent site here at Crestmont Research. He has also written a couple of helpful books on the topic, see his latest Probable Outcomes, Secular stock market insights.
Some have optimistically asserted that the secular bear for stocks that began in 2000 off the highest stock valuations ever in history, ended in 2013 on some of the second highest stock valuations in history because the S&P 500 index finally broke above the previous 2007 cyclical peak. If only a fresh nominal high in stock prices after 7 years of making back losses solved the problem!
Unfortunately fresh nominal highs aren’t the secular bear-ending-test. A fresh nominal high for the S&P in 1972, did nothing to end the vicious down cycles of lower lows, that ran between 1966 to 1982. It took a series of crushing cyclical declines before the secular bear could finally be killed. Here’s Ed’s chart for those who want to see it.
In reality, secular bear-ending-progress requires mean reversion on a host of reliable metrics from historic highs to historic lows. See a great visual summary here: Secular cycle dashboard. (I also have included reference links on some of the key ones as I discuss below).
On the economic rejuvenation side, it will require at least a halving of today’s sky high total debt levels and oppressively large financial sector, along with a sustained uptrend in household income (flat now for 27 years) and doubling of saving rates (from today’s tiny 5% to historical norm’s above 10%).
On the investment side it will require at least a halving of today’s record after tax corporate profits/GDP (today 100% above historic norms), earnings per share, price to earnings (today 26 vs.secular bull births around 8), Tobin Q–market value of equities and debt over corporate net worth (today 1.12 vs .30 at birth of secular bulls), and Buffett’s favorite valuation measure–Market cap of US stocks/GDP (today at 127% versus a historical median of 65%).
Not to mention a crushing of animal spirits from today’s extinct bear sentiment (14.8% bearish Investor Intelligence, vs a long term mean of 30% and >50% at the start of previous secular bulls, and a double, even triple, of today’s miniscule dividend yields (today about 2% to the 7%+ levels that marked the end of previous secular bears).
Just as liposuction doesn’t create fitness, quick price spikes and wishful thinking do not end secular bears. Clearly this one has a lot more work ahead of it before we can earn the next 15 to 20 year, organically driven, investment boom, known as a secular bull. See: Ed’s PE Report for more facts and context:
“The only way to reposition into a secular bull market is to experience a decline in the stock market due to significant inflation or deflation. This can occur either by a significant decline over a short period of time (e.g. the early 1930s secular bear market) or by minimal decline over a longer period of time (e.g. the 1960s-1970s secular bear market)…
Secular bull markets can only occur when P/E ratios get low enough (due to high inflation or significant deflation) to then double or triple as inflation returns to a low level. As a result, secular market cycles are not driven by time, but rather they are dependent upon distance—as measured by the decline in P/E to a low enough level to then enable it to have a significant increase.”