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.

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.

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.

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.

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
Tech stocks show why they're the new safe haven
Tech stocks

Tech stocks show why they're the new safe haven

As global stockmarkets tumbled this week, high-flying tech stocks such as Apple and Amazon gained again.
25 Sep 2020
Markets wobble on second-wave fears
UK stockmarkets

Markets wobble on second-wave fears

Speculation about a new lockdown in Britain saw the FTSE 100 slide 3.4% on Monday, its worst one-day loss since June.
24 Sep 2020
Snowflake: a very special IPO
Tech stocks

Snowflake: a very special IPO

The price of US technology company Snowflake, which floated last week, shot up by more than 150% at one point during the first day of trading.
24 Sep 2020

Most Popular

The electric-car bubble could get an awful lot bigger from here
Renewables

The electric-car bubble could get an awful lot bigger from here

The switch to electric cars is driving a huge investment bubble. But that’s not necessarily a bad thing, says John Stepek. Fortunes will be made and l…
24 Sep 2020
Can Rishi Sunak’s winter plan save the UK economy?
UK Economy

Can Rishi Sunak’s winter plan save the UK economy?

With his Winter Economic Plan, chancellor Rishi Sunak is hoping to support the economy through the dark months ahead as restrictions tighten again. Jo…
25 Sep 2020
The rising dollar is proving bad news for most other assets – will it last?
Investment strategy

The rising dollar is proving bad news for most other assets – will it last?

Precious metals, stocks and pretty much every other asset has taken a tumble as the US dollar strengthens. Dominic Frisby looks at how long this trend…
23 Sep 2020