We’ve a long way to fall yet

A new bull market began in March 2003. Or so most people agree. But a longer-term view suggests that the post-2000 bear market isn't actually over yet, even though the S&P marginally eclipsed its 2000 high in 2007 and that won't be over for quite a few years yet.

History shows that stockmarkets meander in long up and down cycles, with long-term, or secular, bull and bear phases lasting around 15 years. These ups and downs are not economic or earnings cycles; the key issue is valuation. A secular bull market sees markets move from very cheap to highly expensive, while in secular bears the opposite occurs: valuations revert to the long-term average and typically fall below it, which paves the way for the next upswing.

In these phases, markets can slide, or, more typically, drift sideways for years as earnings eventually catch up with valuations but with plenty of ups and downs that can last a few years (cyclical bull and bear markets) along the way.

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The last secular bull cycle was between 1982 and 2000, says Adam Hamilton on Zealllc.com. In 1982, the market was dirt cheap at seven times earnings; by 2000 the S&P 500's p/e was 44, even higher than the 33 seen at the top of the market in 1929. Now it's about 21, having been at 25 just before it bounced in October 2002 and began the upswing that ran until October 2007. So despite the massive cyclical bull run that took the S&P slightly above its 2000 peak, "classic valuation mean reversion" is occurring amid eight years of overall sideways trading.

It was a similar story in the 1966-1982 S&P secular bear, which managed to carve out a series of highs beyond its 1966 level (and also, at one stage, a 50% drop), but still saw valuations slide to single digits. Real returns during this period were virtually zero. So the secular bear trend this time round is intact and, given how long they typically take, it has years to go.

British stocks also didn't hit the single-digit p/e levels that presage a secular bull trend after 2000 before bouncing in 2003, which suggests the mean reversion process is ongoing. And John Robson and Andrew Selsby of Full Circle Asset Management point out that their dividend yield hasn't reached levels associated with the end of secular bear markets (around 6%) either. The big bear market that started in 2000 is still with us.