Monthly chart portfolio of global markets

Source: Merrill Lynch


The chart above, courtesy of the Merrill’s chief Technical Analyst, shows the relationship between long term secular bear markets and valuation as measured by price to earnings (P/E) ratio on a monthly chart.

This is the primary reason I am unconvinced that the secular bear is over, but the length we have endured so far is why I believe we are closer to the end than the beginning.

If you want a more specific forecast date for when I think it will end, my best guess is sometime between next Tuesday and 2017.




Monthly Chsart Portfolio of Global Markets
Mary Ann Bartels
Merrill Lynch, February 13, 2013

Category: Cycles, Earnings, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “DJIA vs S&P 500 P/E”

  1. Petey Wheatstraw says:

    Which Tuesday in 2017?

  2. TR says:

    Thanks BR, that clears up a lot!

  3. tshelton12 says:

    Exactly correct BR. It should be mandatory reading that all investors look at Ed Esterling’s work on secular market cycles. Secular Bear markets (even though we have a small sample) end with P/E in single digits. If this time didn’t end like the last few then we could truly say “This time is different”. I doubt it is different, it never is.

  4. PeterR says:

    The Big Churn (1997-2021) is about two-thirds over IMO.

    If there is one thing about this chart which cries out for examination, it is the spike in 2009 +/- of a high ratio for price compared to earnings (which plummeted).

    Obviously this spike up is off the scale of previous highs. Hmmmm?

    If this was an EKG, would not one ask some questions having to do with the long-term health of the patient after such a one-time spike? Does it suggest underlying systemic flaws or weaknesses, which have not yet worked their way to the surface?

    You betcha IMO, and HAL’s tightening grip on the markets is just such a weakness, among others.

    Dark Swans, Black Pools, manually entered formulas etc. in Excel which lead to incorrect algorithms, etc. etc.

    Hey, did you hear that new group at the Grammy’s the other night?

    “Al Gore and the Rythms!”

  5. jackson0379 says:

    It would be interesting to see the dividend yields and Treasury yields at the end of each bear market cycle vs where we are today.

  6. Thalamus says:

    My forecast is:
    1) Aside from the hit the market will take in 2013 from the upcoming Middle East War, it will continue to rally to new highs by December and continue to rally for several years.
    2) The bond market will continue a planned descent for the next two years with yields rising slowly on all maturities. This won’t be publicized necessarily but has to happen to avoid implosion of debt markets.
    3) Hard assets like gold, copper, land will increase in price over the next two years due to money moving out of bonds and the devaluation of the fiat currencies. Oil will stay the same or decline slightly due to Americas massive reserves coming online.
    4) The higher interest rates will put massive stress on governments, especially the U.S., and combined with the U.S.’s new found strength in energy, a power grab will occur of American assets and political power under the guise of solving the debt issue; but the real cause will be the socialist agenda that’s already moving full steam put in place by the European Oligarchs (who really run this country).

  7. nofoulsontheplayground says:

    I would like to see a formula for comparative valuation that uses the Rule of 20, dividend yield, and the Long Bond Rate to get a better picture of how these different secular bear market lows align.

    Maybe I’ll have to do it myself. Furthermore, tax rates ideally would need to be part of the valuation equation. Lower tax rates support higher P/E’s, as your total return is greater.

    BR, have you ever seen historic market data presented in this comparative manner?

  8. Frilton Miedman says:

    tshelton12 Says:
    February 13th, 2013 at 12:28 pm
    “Exactly correct BR. It should be mandatory reading that all investors look at Ed Esterling’s work on secular market cycles. Secular Bear markets (even though we have a small sample) end with P/E in single digits. If this time didn’t end like the last few then we could truly say “This time is different”. I doubt it is different, it never is. ”


    BR has repeatedly stated that the Fed prevented this (single digit P/E) from happening.

    From there it seems there’s some anticipation from many that it “needs” to happen, that the Fed suppressed a necessary variable to verify the end of secular bear.

    I’m not arguing either way, but to say maybe the assumption that a single digit P/E is necessary might lack empirical data/research beyond simply observing a historic chart of P/E levels.

    Myself, the only thing I’m certain of is that the 10yr won’t be yielding less than 2% in a decade, I’m short T’s, hedged everywhere else, out of gold since 2010, I firmly believe the future lies in political policy that recognizes the difference between a supply or demand crisis.

  9. patfla says:

    Since you’re written S&P 500 p/e ratio, I’ll assume this is 12 mths trailing. As opposed to Shiller’s p/e ratio which is 10 years trailing. There’s at present a striking difference between the two in market valuation.

    (as of this posting date)
    S&p 500 12 mth 17.29
    Shiller 10 yr 23.42

    At a first pass, this means that prices and earnings are more closely matched over the last 12 months than the last 10 years and that implies other things but should also include the historical record (macro picture over the last 10 vs last 1 yr). However, I’d like to know more precisely what this means. Oh yes, we’re in a secular bear market however as posted above secular bears can go into the single digits so the market is possibly overvalued by either measure.

    Then of course there’s QE which in historical terms is very anomalous – it doesn’t have a precedent that I know of. On the other hand, S&P earnings were at an all time high a year or two ago and for that matter the most recent quarter seems to have surprised predictions on the upside – but without much top-line growth.

    Which is not to say that the above is anywhere near all the relevant factors. The world economy is more complicated than ever; technological change enormously fast; and instability and depletion factors strong and growing.

  10. moobycow says:

    tshelton12 Says:
    February 13th, 2013 at 12:28 pm
    “Exactly correct BR. It should be mandatory reading that all investors look at Ed Esterling’s work on secular market cycles. Secular Bear markets (even though we have a small sample) end with P/E in single digits. If this time didn’t end like the last few then we could truly say “This time is different”. I doubt it is different, it never is. ”

    When your sample set is 3 and all of those come from when the investing world was a very, very different place I don’t know how much it tells you. The last time we had a bear market bonds were in a much different place, 401k didn’t carry the hopes and dreams of a nation and avg person couldn’t jump in an out of stocks for $8 a trade. Not to mention fed intervention etc.

  11. tradeking13 says:

    Buffett’s Favorite Valuation Metric Surges Over the 100% Level (PragCap)

  12. BITFU Search Engine says:

    Secular Bear Market vs. No Longer Secular Bear Market is utterly meaningless.

    It’s bad enough that there have only been FOUR Secular Bear Market periods…and I guess, maybe if you really tried..and were really bored…or you had to sell BullSh*t research a la Merrill…then you could cull some meaning but for one small detail: There have only been THREE “No Longer Secular Bear Market” periods.

    I get why BR wrote about this in 2003… and despite the fact that the Iraq War was not the impetus for any wicked sell-off, it was a good call. Pulling the same excerpt that BR recently pulled:

    “The panoramic view leads me to the present conclusion. Following an 18-year Bull market [1982-2000], and a three year Bear market, we are now committed to what looks like a long-term military obligation in Iraq. In the grand scheme of things, I suspect we are in for a harder long-term slog than the mere 3 year Bear market suggests.

    Historically, this suggests an extended period of range bound trading as the highest probability long-term scenario in my view. I expect vicious rallies, and wicked sell-offs to occur — over shorter term cycles — within the larger timeline. Active management and capital preservation are going to be the key methods of outperformance.”

    Now, if you could go back in time…and you didn’t know any other details, but DID know that Barry was, indeed, correct in calling the SBM…what would you have done?

    You’d have either gotten killed from 2003-2007 shorting the market or you’d have missed out on DOW from 9k to 14k. [If you don't think you'd be doubting this call when DOW got to 13k, you're lying.]

    Then, you’d have made your money back–and then some–as the market fell to 6.5k in March of 2009. Would you have gotten out at the bottom? Even better, would you have gone Long, like BR, at the same time?

    Maybe…but then you’d very quickly be back to where you started…would you have forced yourself to stay long…even though you KNOW it is a Secular Bear Market? I doubt it.

    And here we are.

    This isn’t a knock on Barry, either about SBM semantics. He made some great real-time calls along the way and managed to reap profits from Longs, even though he held his nose while doing so…

    Rather, it’s just a statement that all discussion about Secular Bear Markets and their “averages” and attendant P/E ratios when we have samples of freaking 4 (and null-samples of 3!)…is-utterly-meaningless.

    Thank you. This has been a public service message from BITFU Search Engine.

  13. mad97123 says:

    From yesterday’s interesting piece on 1929 valuations:

    “I think a good way to view bear markets is to divide them into two categories. One is when prices far overshoot fundamentals. The other is when fundamentals crumble beneath prices; 1987 and 2000 are examples of the former, 1990 and 2007 are examples of the latter. I would say that 1929 is another good example of fundamentals falling apart beneath prices. So were stock prices overvalued in 1929? I think it’s fair to say that stock prices became “elevated” but I don’t believe it was anything truly excessive. “

    So will the inorganic debt based earnings continue to grow or colapse like 2007?

  14. Frilton Miedman says:

    mad, excellent observation, which goes with my above statement – “…. the future lies in political policy that recognizes the difference between a supply or demand crisis.”

    Corporations are drowning in cash, wealth disparity is at 1929 levels, and the GOP is ranting on and on about tax cuts for “job creators” along with entitlement cuts to the already depleted.

    If my doctor told me I needed a leg amputation to cure a headache, I don’t care how much theory he throws at me, I know he’s wrong and it’s time for a new doctor.

  15. DJM18 says:

    Fair enough, but I leave you with this thought which could make for a good piece in a future post. What else beyond valuation is necessary to set the stage for a next secular bull market? Some time back I read a piece from Gavekal on this issue where they talked about three pillars, valuation being one. But the others (which I have forgotten and am searching for) are also important.

    If we look for example at the secular bull market which started in the early 80′s we had in addition to compelling valuations, i) the start of a 30 year bull market in bonds as Volkner broke the back on inflation; and ii) a tremendous cycle of productivity in the form of coputer technology in addition to good deflation through the growth of offshore operations.

    Could we perhaps speculate that the oil boom in the US be on such pillar for the next secular bull market? Do you believe that there have to be other pillars and if so, what is your best guess as to what they may be?

  16. SecondLook says:


    There is no oil boom.

    What we have now is increased production due to the price of oil being high enough to justify very expensive extracting. Fracking – contrary to the uniformed/ill informed stuff being written – is both old technology, and costly; like deep-water drilling.
    At a $100 or so a barrel, we are able to exploit oil fields that were too expensive before. It’s good news for domestic oil producers, but for the big players only modesty: high output is largely offset by higher costs. It’s good for our trade deficit, but that will only have a very minor affect on our whole economy. For almost ever company, and every consumer, more domestic production of hundred buck oil isn’t going to change anything.

    Well, it may have one important effect: Getting people used to the notion that cheap oil and the attendant prosperity and lifestyle associated with that, is dead and gone.

  17. TerryM says:


    Have you tried looking at the valuation in the markets differently? Instead of P/E how about inverting the ratio to get the earnings yield (or Dividned Yield) on the market, comparing the earnings yield across the last three secular bear market bottoms to the prevailing yields on debt instruments at those times. With the key being understanding what is the yield spread – Earnings Yield vs. Fixed Income Yield. Given the historically low interest rates investors are getting on debt instruments does the earnings yield spread on the S&P 500 today at 13.5x compare favorably to the last bottoms in the market. If the answer is yes, then maybe we are closer to the bottom than the ‘traditional’ metrics would suggest.

  18. DJM18 says:

    Second Look:

    You are probably right, I should have left that out to not get side tracked on a debate on recent oil production activity in the US. More importantly, one Gavekal piece I found on the web talks about the following three pillars for a Bull Market:

    Valuations: Earnings Discount Models / Asset values / Purchasing parities

    Excess Liquidity: Central Banks / Velocity of Money / Foreign fund flows

    Economic Activity: Earnings momentum / Market mmentum / Relative and Absolute economic performance

    I will let those better prepared comment on each of these to see if it sheds some light on better understanding when we may have a proper foundation for a secular bull market. It certainly does not feel as if all the pieces will fall into place by next tuesday.

  19. DHM says:

    Re: BITFU Search Engine Says’ post

    I have to say this is probably the best and wittiest post I’ve read on BP in the last couple years…excepting BR’s stuff, of course.

  20. hue says:

    I don’t know if BR ever “defined” secular bear market in a trading sense. Even if you know the exact date a secular bear begins, you don’t stay short. There are vicious swings, vicious rallies. Todd Harrison has said it’s hard to make money in bear markets because of the swings. Especially if you use leverage. Even in a secular bull started in 1981, you don’t just buy and hold, especially in 87. We’re all trying to find the trend.

  21. speck says:

    Yeah! With the market cap/GDP ratio at 110% (median 67%), ttm P/E at 17.26 (median 14.51) and Shiller P/E at 23.42 (median 15.87%) – this is how a new secular bull begins. It’s a new paradigm all over again!

    Now, I think the FED and the algos will push S&P to new highs later this year, to 1666 preferably))) forming a gigantic multi-year megaphone formation, but there’s no way on Earth they will cheat the laws of physics and economics. We’re in the bubble and the smart money recognise it and won’t fight it which will give the reason to “gurus” to proclaim the coming of the greatest bull ever. And fools will be buying the top en mass again.