“Just like a recession, they’re hard to define in real time. It’s much more obvious in retrospect . . . If you said that stocks could be up 10% or 20%, I’d say ‘sure.’ But that wouldn’t violate a more than a decade long period of chopping back and forth.”

- Ed Easterling, Crestmont Research



Last Monday, we looked at whether the Secular Bear Market was coming to an end? and discussed it on Bloomberg TV and Yahoo Finance. I am unsure its over, but barring a Japan like 30 year recession, we appear to be much closer to the end than the beginning.

The secular meme has spread, most recently in today’s WSJ, Is Bull Sprint Becoming a Marathon?:

“the rally at the beginning of this year—and signs that investors are putting more money into stocks—has fueled a debate about whether that extended bear market may be over. That would signal the dawn of a secular bull market, priming investors for years, and possibly decades, of double-digit gains.

There is no single marker for the start or end of a secular trend, a fact that has contributed to the debate over whether there has been a secular turn in stocks.

That differs from shorter-term, or cyclical, bull and bear markets, which are broadly defined by gains or losses of 20% from a recent low or high. And because the secular-market trends can last for well over a decade, there are relatively few to study.”

As previously discussed, the caveat to this is the FOMC wildcard. QE and ZIRP make it difficult to think of most gains as completely organic. It also has made any comparisons to prior secular bull markets more challenging, as it introduces another variable.

Under ordinary end of secular bear market conditions, I would like to see P/E ratios even lower and stocks even more hated/ignored. The Fed has disrupted those metrics and that makes seeing the end of the secular bear all the more challenging.


The price weighted Dow at all time highs is the wrong index — look at S&P500

Source: WSJ


Is Bull Sprint Becoming a Marathon?
WSJ, ABREAST OF THE MARKET February 11, 2013

Category: Cycles, Markets, Technical Analysis

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.

24 Responses to “Secular Bear Market “Hibernation””

  1. adbutler007 says:

    Barry, I’m confused about how you can quote Easterling but in the same paragraph wonder whether the secular bear is over. With CAPE in the top quintile, and EV/balance sheet metrics (I.e Q ratio) between 35% and 55% above their very long term average, it just isn’t possible mathematically. That is, unless you are of the opinion that multiples aren’t mean reverting in the long run.

    I challenge you to read any of Easterling’s or Hussman’s or Grantham’s or Assness’ recent papers and still remain open to the idea that we may have put the secular bear behind us.

    For a list of these papers go here:


    Love to hear your thoughts after you read some of these pieces. Cheers!

  2. Dear Confused:

    1. I did not say the secular bear market was over; I wondered whether it was coming to an end. (Might you have even noticed the title of this post?) You are creating straw men to argue against.

    2. When referencing a 14 year event, its last stages are measured in quarters and years, not hours or days.

    3. I wonder about lots of things; that’s why we explore them here..

    4. “I am unsure its over” — what about that sentence do you find confusing?

    5. I suggest you reread this post, and the original post, then watch both videos to understand the nuance and context — they seem to have escaped you.

    May I suggest a refresher course in reading comprehension, rhetoric and cognitive bias?

  3. ironman says:

    It might help to consider what’s really behind the rally in stock prices. Added bonus – the Fed’s latest QE efforts don’t appear to be affecting asset prices in any meaningful way….

  4. crutcher says:

    Would like to hear about why a multidecade Japan style hibernation isnt worth considering. There is so much toxic debt out there, and a central bank determined to keep banks solvent at all costs…


    BR: Didn’t say it wasn’t worth considering, what I said was we were closer to the end than the beginning “barring a Japan like 30 year recession” — meaning, so long as we are not Japan, we are greater than halfway thru.

  5. honeybadger says:

    I have no idea if we are closer to the end or to the beginning, but this is an interesting question from the point of view of probability theory.

    Many waiting processes are modeled by the exponential distribution. This distribution has an interesting property in that it is memoryless. This can be explained as follows: say event times are exponentially distributed with a mean wait time of X units (minutes, years, whatever is appropriate for the process being modelled). The memoryless principle states that this mean expected wait is constant, regardless of the time since the last event. In english, if you have been waiting Y time units, then your expected wait is still X, not X-Y.

    So if “duration of bear markets” is exponentially distributed, with a mean of 14.5 years, and if we are ten years into this one, then our expected wait until it ends remains 14.5 years, not 4.5.

    If this is counter-intuitive to you, it is probably because you tend to think in terms of Gaussian distributions.

    Not that I am claiming any insight into the shape of the probability distribution which best describes bear markets…

  6. blackvegetable says:

    “Going by the elevated motor gasoline prices that have come to characterize Barack Obama’s years as U.S. President, it appears that the U.S. unemployment rate will skyrocket up to 11% early in 2013 if the correlation between gasoline prices and the unemployment rate two years later continues to hold.

    Regardless, whoever wins the Presidential election in November 2012 is going to have their work cut out for them in cleaning up what looks to be one big man-caused disaster. ”

    Since you are in the hizzy, I-man…..

  7. adbutler007 says:

    Hey Barry,

    Fair comments. I’m (obviously) frustrated that this meme has taken root, especially since I have yet to hear any arguments, with supporting evidence rooted in long term data (i.e. data going back before 1990), that support any conclusion other than:

    1. Markets are historically quite expensive: around 80th percentile in terms of margin adjusted earnings metrics or balance sheet metrics

    2. Real returns from these valuations are likely to be much lower than the long term average

    Of course, as you have rightly pointed out many times, this overvaluation can be resolved in many ways, including a major surge in inflation, a long sideways choppy period, or another major bear market. But the (almost) indisputable reality is that secular bull markets don’t start from historically lofty valuations, and valuations today are more consistent with major market secular PEAKS, not secular troughs.

    I’m all for a considered debate, and I crave data to consider in support of the alternative case, but I have yet to see any.

    By the way, the TTM or Forward PE arguments are not statistically useful, as these metrics do not offer any meaningful information related to subsequent returns (as we explored at great length in our Estimating Future Returns post http://advisorperspectives.com/dshort/guest/BP-120808-Estimating-Future-Returns.php). The problem with these contemporaneous metrics is that they don’t account for the mean reverting nature of profit margins and the business cycle.


  8. crutcher says:

    It seemed like the Japan comparison was something you were ridiculing, perhaps my misreading. But then lets hear your serious view on Japan vs US monetary and fiscal policy.


    BR: No, if we turn Japanese, than this is closer to the beginning than the end!

  9. adbutler007 says:

    Oh – I forgot to explicitly mention that I am not making any assertions about where markets will go this year or next year. Rather, I am suggesting that the long term (read 7 – 20 years) inflation adjusted returns from these valuations will _probably_ be low, and that institutions and investors should budget for these low returns.

    Incidentally, I’m not sure if you read the CS 2012 chart book, but the authors conducted a study of 5 year returns subsequent to contemporaneous interest rate quintiles across countries, representing over 2000 aggregate sample years. We are in the 2nd quintile, where future real returns have averaged ~3% real, which is consistent with the other studies I mentioned above.

  10. danm says:

    Notice how everyone is disgusted with housing. The bear will be over when everyone feels the same repulsion towards equities. It’s called throwing in the towel. We have not see it yet. When makrets tanked in ’09, my mailbox was full of broker letters saying to stay put. I am waiting for letters saying that equities are the worst investments you could ever make.

    The middle class has been torched. I believe we will not see the end of this cycle until the top 2-15% goes through the wringer also.

    Of course, I keep monitoring the market for signs that I might be wrong and try to capt some gains from the cyclical bull.

  11. Scott Frew says:

    Hey Barry, I’m going to take adbutler007′s side, or at least defend his reading comprehension. You write: “I would like to see P/E ratios even lower and stocks even more hated/ignored …

    Those “even”s preceding lower and more hated imply that PEs are pretty low, and that stocks are mostly hated, at the moment. I’m not sure how else you’d interpret that word. And adbutler’s point, specifically it would seem with regard to PE ratios, is that Easterling (I guess; I haven’t read his work.) and Hussman, Grantham, and Assness, with all of whose work I’m very familiar, point to the fact that judged by CAPE and Q, which as Andrew Smithers also convincingly and consistently points out, are the only measures with predictive power over the medium to long term (though with little predictive power over the short term), PEs not only are not pretty low, but are in fact really high, a statement borne out by the fact that whenever they’ve reached these levels in the past, stocks have in fact fallen over the medium to longer term, and by significant amounts. (Hence Smither’s claim about their predictive power.

    As to stocks being relatively hated, as implied by the second half of your sentence, I’d ask you by whom? David Tepper pretty much thinks they’re a one-way bet. So does Lee Cooperman. Ray Dalio is bullish. I had lunch two weeks ago with a prominent hedgie, who’ll remain unnamed, since the dinner was somewhat confidential, just back from Davos, who was extraordinarily bullish: Europe was solved, central banks worldwide had taken all tail risks off the table, and the US, driven by shale oil and housing, was about to boom–unemployment would be hitting and going under the Fed’s 6.5% bar with 18 months, and the Fed would be normalizing its balance sheet. Even bears on the economy–Jason Trennert, as an example, who thinks we’re borderline recession, and that sequestration is going to happen, as he noted in an interview with Larry Kudlow several weeks ago, finished those comments about the economy by saying, I’m bullish, buy stocks, or words to that effect. BofA’s out with a note this morning saying investors are more bullish than in 99% of all perios since 2002, according to a post this morning on Business Insider.

    So I’ll admit to having been puzzled by your statement which I quoted, and I can understand adbutler’s confusion.


  12. Scott:

    Who hates Equities?

    David Rosenberg
    Zero Hedge
    John Hussman
    Dylan Grice
    Gold bugs
    Albert Edwards
    Jeremy Grantham
    Gary Shilling
    Peter Shiller

    Amongst the bulge brackets:
    Morgan Stanley’s strategist Adam Parker has a S&P500 target of 1434 (Earnings of $98.71)
    UBS strategist Jonathan Golub has a S&P500 target of 1425 (Earnings of $108)
    Wells Fargo strategist Gina Martin Adams has a S&P500 target of 1390 (Earnings of $103)

    and I would add, mom & pop / Main Street.

    Yes, we had a huge inflow in January — but that’s 1 month — ONE MONTH! — after 36 months of outflows.

  13. mad97123 says:

    The direction of interest rates will be very important if Buffett’s analysis in the article posted last week is correct.

    “…the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. ”


  14. tbrogs says:

    The S&P500 Equal Weight Index is broken out of the secular bear market and now at all time highs. Looking at it from a pure technical perspective one had to buy the breakout and then buy the retest of the breakout on a pull back. However, if the prior highs support level is broken and the S&P500 Equal Weighted index drops below the prior highs then this will all be considdered a “Key Reversal” and the secular bear will be back in play. Until then, we have broken out of the secular bear market and one needs to play the long side and buy the dips until evedence tells us otherwise.

  15. Petey Wheatstraw says:

    With so much in the realm of money and finance all screwed up beyond redemption (lots of toxicity — Chernobyl like), I don’t think we’re in Kansas anymore. Don’t think we’ve been there for a while. Anyone who says they know where we are or which we’re going (or even which way is up), is a huckster. They could be right, or they could be wrong, but they are only guessing.

    I believe an honest accounting would bankrupt us.

    Unless papered-over losses, unchecked criminality, dishonest GAAPS, and the trend towards ignoring it all is suddenly reversed, I foresee a future of multiple Black Swans being sucked into the intake ports of our 747 economy. Stocks will not be immune to the effects of any given unforeseen crisis.

    Some players will be insulated against any negative event. Most likely not me, you, or anyone we know.

    Most frighteningly, there is no good or safe alternative.

  16. mad97123 says:

    I would argue many of rhe bears listed above don’t hate equities, they just aren’t buying them when their models tell them they are overvalued, in aggregate.

    Ma & Pa may truely hate\distrust equites, but knowbody really gives a rat’s ass about them, they don’t have any money.

  17. Scott Frew says:

    Barry, looking at your list, can we throw out gold bugs and recessionistas as being a bit on the vague side? As to the others, I readily concede that they come with bearish reps, no question. But let’s look at (some) of their recent views.

    Rosie this morning: “Beyond frothy investor sentiment, there seems to be nothing in the way, even technically, to prevent the bulls from retaining the upper hand for the time being. Policymakers are doing all they can to maintain an even keel not to mention massive liquidity growth–helping to take equity and interest rate volatility down to levels not seen in six years.” Sorry, but that’s not the voice of a bear over the near term. He does go on to point out that the reason the Shiller CAPE ratio deserves respect “(it is not a market timer) is that when it is abo e 22x as it is today, annual average returns are 1% for the next decade.” So certainly not long term bullish, but again, the first statement above is not that of a hater of equities.

    I don’t spend a lot of time with Zero Hedge, so I’m leaving that one aside.

    John Hussman is unequivocally bearish.

    Dylan Grice left stopped publishing at SocGen in November, so it’s a little difficult to know what he’s thinking today. I’d be hard-pressed, though, to characterize him as a hater of equities. Recall that of the two, Albert’s the macro guy, and Dylan always wrote much more nuanced notes–not necessarily because he was a more nuanced thinker, but simply by the nature of their respective roles. He certainly often wrote abou the shortcomings of central bankers, and rued the direction in which their folly was leading the world. But just as often, as a committed value investor, he’d publish notes that would suggest stocks which his discipline led him to believe offered favorable risk-reward characteristics. So I think you’re being overly dogmatic in declaring him a stock hater.

    Also interesting to note he left SocGen for a long only fund, admittedly driven by the opportunity to work with one of the world’s great investors, but still.

    Albert Edwards: Agreed again, unequivocally bearish.

    Jeremy Grantham. Again, I think you’re viewing what is a really gray case in a black and white manner. GMO relies heavily on CAPE and Tobin’s Q in constructing its long term asset class return views, which have been astonishingly accurate over time. And so clearly that leads him to be less than constructive on the US market over a longer term. And Jeremy’s been much in the news for his permanently lower growth view of the US economy, taking off on Robert Gordon’s work. But note this from his just-published year end investor letter; “This is where I break ranks with many pessimists because I believe theory and practice strongly indicate that lower GDP growth does not directly affect stock returns or corporate profitability.” Again, hardly the words of an equity haater–though I’ll agree that he’s hardly a bull.

    Gary Shilling’s first report of the year includes this in its summary of its contents. “This climate favors “risk on” investments, which we are reluctantly following in our current investment themes, but with caution. … Unless the global economy leaps to meet investor expectations, disappointments will follow and a shift from “risk on” to risk off”. A substantial shock will precipitate this shift and a global recession.”

    So again, can we say a bear who’s been driven by market action to recommend a bullish investment posture at the moment? I think his timeline is basically first half bullish, second half bearish.

    As to the three sellside strategists, Adam Parker is the only one with whose work I’m really familiar, so I can’t really comment.

    I agree completely about Mom and Pop/Main Street, but they’ve been out of the market “forever”, more or less, since long before this rally began. I don’t put any stock in the January inflows as part of my analysis; I suspect a lot of that is essnetially money that came out in December in anticipation of higher cap gains taxes in 2013, now coming back in.

    How influential do you think the people you named are, even assuming they were as bearish as you claim. And how much air time does that group get on CNBC and Bloomberg TV? Rosie aside, when was the last imte you saw any of those other guys in either of those venues.And I hope I’ve convinced you that most of them are anything but, in the near term,m though it could certainly be, in the curreent investment climate, that cautious is the new bearish equity hater.

    Investors Intelligence, btw, has both bulls and bears right at the cusp of the levels at which both become contrary indicators, i.e. too many bulls, and too few bears.


  18. James Cameron says:

    > I would argue many of rhe bears listed above don’t hate equities, they just aren’t buying them when their models tell them they are overvalued, in aggregate.

    Which has not always worked so well . . . Hussman’s Strategic Growth Fund is down over 16% since the market nadir in January of 2009, and approximately the same since January of 2012, despite having as one of its primary goals “protection of capital during unfavorable market conditions.” The S&P has doubled since January 2009. This fund’s best period was during the four year stretch beginning in 2000, following the market’s bubble pop. If in fact Hussman is correct regarding equities now, it’s not clear to this observer when his clients will get back to even.


    BR: Most haven’t bought equities since before 2007 . . .

  19. DRR says:

    A true secular bull market needs to align with a real boom in the economy-people buy long due to optimism about future growth. The only reason people are moving into the current market is to chase yield but they d0nt trust the fundamentals and will move the mouse at the first sign of trouble. This explains some of the popularity of the new ETFs, a quicker rush to exits than allowed by individual stocks/mutual funds. The average age of the baby boomer is around 55 and working so in the aggregate they are still putting money into the market so this rally could have some legs but longer term I expect the market to fizzle. Lost of stocks are being purchased on margin to chase the market up and when leverage is used it is almost inadvertently followed by a deleveraging(crash). One more crash of 30+ loss and you will see no enter the market for a long time expect for pure dividend plays.

    Is this 1937 or 1982? Who knows?

  20. Iwasframed says:

    Nobody does data read better than Hussman but … It’s great to consult him for reality checks each week in his Weekly Commentary but beyond that beware. Basically his take on 2009 and subsequent runup is: whoops who could have known that 2008-2009 could be modeled on depression era data but were good now, got it included in my “ensemble method”. Which puts a point on most efforts at predicting anything midterm — better be good at cut and paste and it will be too late.

    And one final thought — never trust investment advice from someone who times his purchase based on yours. By the time a heavy technical trader has posted his take, she has bet against you.

  21. DRR says:

    “Ma & Pa may truely hate\distrust equites, but knowbody really gives a rat’s ass about them, they don’t have any money.”


    Your right, Ma & Pa are broke, It is the Ritholtzs and company that need to put their cash into markets to climb it…

  22. mad97123 says:

    “Mr Klarman is patient and confident enough to do nothing. He currently has around 30%—and has been known to have as much as 50%—of his portfolio in cash.”

    “Mr Klarman has been critical of governments propping up markets through stimulus and keeping interest rates low, all of which has perverted markets. But this is the type of environment where bargains will eventually surface.”

    So Klarman is not bearish he is just confident – bargains will eventually surface.


  23. Greg0658 says:

    when I read this title this morning – what came to mind is
    wish someone would invent a human bear hibernation machine*
    that way – sleep away till cash rings the bell via a door knock, phone call or email
    (needs a Fun bell wakeup too)
    but the machine should understand the difference of a cash call and a request cash call

    * thing is – thats not how it works – awake makes the world go round