Advertisement

The bear market has unfinished business

Stocks are rising for the moment, explains Andrew Van Sickle. But the longer-term trend is still unmistakably bearish.

Are we still stuck in a long-term bear market? That sounds like a stupid question, says John Authers in the Financial Times. The S&P 500, which sets the tone for the rest of the world, has almost trebled since March 2009. It now stands at a new record high. But the question isn't as straightforward as it seems.

Advertisement - Article continues below

In 2003, a multi-year rally began in Western markets. Many hailed a new long-term bull market. Others, including MoneyWeek, suspected that the rally was probably just a bounce within a long-term, or secular, bear market a huge bear-market rally.

In 2008, we were proved right: the S&P plumbed new depths, proving that the post-2000 bear market had not ended.So could this rally be another massive bear-market rally? Yes. Here's why.

Secular bulls and bears

They then overcompensate by being bearish for years, during which they avoid or sell assets until they become absolute bargains. These long-term valuation upswings and downswings secular bulls and bears last for 15 years on average.

Advertisement
Advertisement - Article continues below

In secular bulls, cyclically adjusted price/earnings (Cape) ratios rise from single digits to above 20. The pattern was evident in the big post-war rally of the mid-1940s to the mid-1960s and during the 1920s.

Between 1982 and 2000, the biggest secular bull on record, the S&P's Cape rose from around seven to over 40, when the tech bubble peaked.

Advertisement - Article continues below

Conversely, the 1966-82 bear market ground valuations down from high double digits back to single digits. There was another secular bear from 1929 to the mid-1940s. 2000 marked the start of the latest one.

Fifteen years on, history suggests we should really be getting going on a new bull cycle. But the last bear may not have hit bottom yet. In 2000, the euphoria peaked and the Cape began to fall. But it was still historically stretched in the 20s when the 2003 rebound began.

Then, in 2009, it only fell to ten, not to six or seven, the sort of single-digit values that have historically heralded a secular bottom. Now it is back to overvalued levels. If the bear market isn't over yet, it doesn't necessarily mean that stocks must plunge.

The other way for valuations to fall to enticing levels is for earnings to rise as stocks grind sideways. Secular bear markets are usually a messy combination of the two.

It's the economy

The 1966-82 bear was a result of inflation getting out of control; the following bull market was all about the defeat of inflation and deregulation. The post-2000 era can be seen as a long economic hangover.

Central banks inflated the credit bubble in order to mitigate the impact of the bursting of the tech bubble. Then they printed unprecedented amounts of money to temper the effect of the burst credit bubble. The sub-par global recovery shows we are still stuck in the hangover.

We certainly aren't in an economic environment that history suggests accompanies a secular bull market.

It seems plausible that central banks' continual liquidity boosts have prevented valuations from hitting the usual floor, making them pricier than the economic backdrop would warrant. Without constant money printing, stocks would be nowhere near this far ahead of the fundamentals.

Can central bankers put off the evil day forever? The shaky, artificial nature of the rally, and the still-lacklustre economic backdrop, makes us suspect that the post-2000 bear may yet have unfinished business.

Advertisement
Advertisement

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
There are lots of reasons to be bearish – but you should stick with the bulls
Stockmarkets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
What gold, bonds and tech stocks have in common
Stockmarkets

What gold, bonds and tech stocks have in common

"Risk off" or "safe haven" assets such as gold and government bonds have been doing well lately. But so have riskier tech stocks. That seems to defy c…
10 Jul 2020
How Covid-19 sparked the return of the day trader
Investment strategy

How Covid-19 sparked the return of the day trader

Lockdown boredom has unleashed a horde of speculators on US stocks, with predictable consequences.
7 Jul 2020

Most Popular

An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Three ideas for Lloyds Bank's new boss
UK stockmarkets

Three ideas for Lloyds Bank's new boss

The Black Horse needs whipping into shape. A change at the top provides a great opportunity, says Matthew Lynn.
12 Jul 2020
Why the moving average is my favourite charting tool
Sponsored

Why the moving average is my favourite charting tool

Traders and technical analysts use "moving averages" to iron out daily fluctuations and give a much clearer picture of a market's direction. Dominic …
13 Jul 2020