A Cyclical Bull Market Within A Secular Bear Market

With the year winding down, equity strategists are busy putting out their outlook for the next year. In a recent article David Wilson, of Bloomberg, featured a report from Binky Chadha, Deutsche Bank’s chief US equity strategist which seemed familiar.

Chadha pointed out that the 10 year rolling return of the S&P 500 index is now in one of those historically rare troughs. And based on this, suggested that the next 10 to 15 years will be very good for stocks.

Long time readers may remember highlighting this amid the darkest days of the 2008 bear market: Why Long Term Investors Should Consider Buying and again in March 2009, just as the bull market was starting: Revisiting the Long Term Bullish Case for Stocks.

Here is an updated chart from early 1900’s to now:

Source: Data from Prof. Shiller

It is important to note that the data is based on ex-dividend S&P 500 index levels and that dividends provide a significant boos to total returns. But since we are also ignoring transaction costs and taxes, let’s pretend that the difference is small.

In any case, the chart can be interpreted in differing ways depending on your personal bias. If you’re bullish, it is indicative of blue skies and a forecast of a similar run up to 280-300% returns within the next decade.

If you’re bearish on the other hand, it confirms just how bad things are. After all, previous intervals of history that shared similar negative returns are infamous to any trader: 1932, 1939 and 1975. Those were grueling bear markets that devastated portfolios and made mincemeat of the majority of investors who tried to time the ensuing markets.

Personally, I’m agnostic. I used this chart originally to offer a calming (very) long term perspective. A bear market can be very painful emotionally and it is easy to get caught up in the fear and loathing. So hopefully the previous two times that I wrote about this helped some people to come to grips with the fact that the world was not, in fact, ending.

This therefore, is more useful in pointing out that the worst is over, rather than being a predictor of better times ahead. According to the 18 year commodity/stock market cycle we still have about 6 years left to go.

That is, if we assume that the huge base that is being built by the major indexes going sideways won’t be over for the typical 17.6 years and if we assume that it started at the 1999 bubble top. As I outlined yesterday, the current bull market is healthy and will probably continue. But it is a cyclical one. A secular bull market of the kind that propelled stocks like a rocket from 1982 to 1999 isn’t around the corner.

That’s why I don’t agree with Chadha’s forecast for the S&P 500 index to close at 1550 by the end of 2011. This, by the way, is the highest forecast by at least 100 points. Chadha also had a very bullish bias for 2010, estimating that the S&P 500 index would finish this year at 1325 (or 7.3% higher than today’s close).

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8 Responses to A Cyclical Bull Market Within A Secular Bear Market

  1. Onlooker says:

    Good thoughts. To use this chart in isolation to forecast as Binky has (WTF is with that “name”?) is ridiculous. I’d much rather use a methology such as Dr. John Hussman uses to forecast the 10 yr return. It has a very good track record and forecasts something along the lines of 2-5% in ten years (depending upon whether using earnings or dividends model). And that implies that we will see much lower levels in the interim to get the more historical long term returns of 10% or more.

    Looking at this chart, who is to say that 4-5 yrs from now we aren’t at about zero, as is the case of 74 to 78-79 (just eyeballing the chart)? Or even worse, like 32 to 39 or so, with terrible negative numbers. These are much more likely outcomes given the bigger perspective of our situation and the secular cycle that you point out. There are very likely to be much better levels to enter for LONG TERM (i.e. buy and hold) positions.

    This (Binky’s assertion) is clearly a case of bias confirmation and flat out sell-side foolishness, or worse, deception.

    • Onlooker, the other aspect of this is that valuation is not at levels that correspond to the birth of secular bull markets. According to Shiller, the cyclically adj. price earnings ratio is at 22.

      It got close (13) to single digits in March 2009 but now it is back up to a relatively high valuation area. The single digits is how cheap things have gotten before a new secular bull market started.

      • Onlooker says:

        Oh I definitely agree with that. I could have written much more about why I don’t think we’re launching into a new secular bull any time soon.

  2. Alex says:

    Hello Babak, which files I need and how do you compute the chart above ? I would like to check what happened to the S&p500 or the Dow ten year after this data crosses historically below -20%. Thanks in advance.

    • Alex, you can find the file here. Come back and share with us what you find re performance after crossing -20%. I suspect you’ll have to use a long term time period – at least a year or more – to get a significant positive return because mean reversion at this level takes a while to kick in.

  3. Tiho says:

    When the 20 year rolling performance comes close to 0% returns (currently at 6.4%), that is also when the new secular bull markets occur. The years when 20 year rolling performance touched 0% returns were 1920/21, 1932, 1948/49, 1981/82. In March 2009, we came as low as 4.2%, so not quite there yet! On the other hand, the 10 year rolling performance is slightly more volatile, and as someone mentioned above, we could experience another sell off down the track, due to high P/E and cluster of resistance areas above.

  4. Alex says:

    Hello Babak,

    you could find what I found following this link https://docs.google.com/present/edit?id=0AeUMBQXriWILZGQ5ODR2MnJfMGZxNzJqcGRm&hl=en&authkey=CKWCq7wO

    I have taken the first signal under -20% that came at least 4 years after the previous ones (just to remove consecutive breakouts and take the major picture).

  5. PEJ says:

    I’m leaning toward Robert Shiller instead of this Binky guy though:

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