This Secular Bear Has Only Just Begun
Ed Easterling
Crestmont Research, October 4, 2012



Secular bull markets are great parties. Investors arrive from secular bears really wanting to take the edge off. As the bull proceeds, above-average returns become intoxicating. By the time it is over, the past decade or two has delivered bountiful returns.

In contrast, secular bears seem like hangovers. They are awakenings that strip away the intoxication, leaving a sobering need for an understanding of what has happened.

Conventional wisdom explains these periods as irrational or coincidental periods. In reality, secular bulls and bears are periods driven by longer-term trends in the inflation rate. A trend away from low inflation, whether to high inflation or deflation, drives the value of the market lower. That leaves investors with below-average returns. The return trip — when the inflation rate trends toward low inflation — drives the value of the market higher. That provides investors with above-average returns.

Then there was the “party” in the late 1990s! Intoxication!! Can you imagine a party so extreme that you end the next day feeling just as groggy as when you first woke up? A long, long day of frustration and misery? That day was the past decade. In stock market terms, it has been twelve years of pain that just now brings investors to the starting line.

Wake-up…this must be a nightmare.

Oh no, it’s not!!!

This is a moment of consternation — an eerie tension between hope and fear. You find yourself saying, “It’s not fair… It doesn’t seem right… Secular bear markets average eleven years, don’t they? Isn’t this one supposed to be over by now? Some pundits are saying there might be just a few more years left in this nasty old bear… What do you mean this secular bear has only just begun?” We’ll get to that in a moment; but for now, please step back from the edge.

Even if a big bull is not around the corner, there’s plenty of opportunity. In fact, it is conditions like these that provide the greatest potential for astute investors. First, they must understand the environment. Then, investors can use that knowledge to their advantage. This discussion is about the first part — understanding. The upcoming charts will explain why we are actually early in the current secular bear and how we got here. There are many other resources for the second part — what to do about it.


Let’s start with a look at secular bull markets over the past century. Figure 1 presents all four secular bulls since 1900. Each line represents the price/earnings ratio (P/E) annually over the life of the four secular bulls. The level of P/E is displayed on the vertical axis. Time, in years, is displayed on the horizontal axis.

To reduce the distortions to P/E caused by the earnings cycle, earnings (E) have been normalized using the approach popularized by Robert Shiller at Yale. The index for the numerator (P) is the year-end value for the S&P 500. Therefore, the P/E displayed on the chart is the year-end Shiller P/E (i.e., Year-end P/E10).

Figure 1. Secular Bull Markets

First, note that secular bulls start when P/E is low and end when P/E is high. The low points for all secular bulls have been quite similar. In the chart, the low range is designated with green shading. The high point for all secular bulls had also been fairly similar, until the late 1990s. It is as though the 1980s/1990s secular bull ran its course through the mid-1990s, then the party started and P/E more than doubled again. The already high P/E ascended to the stratosphere. Pundits often compare the late 1990s to 1929. Yes, the valuation of the market (as measured by P/E) was fairly high in 1929. But 1999 is in a league of its own.

As the new millennium opened, the bubble stopped expanding — but it did not pop. An immediate decline of fifty percent would have been required to correct the excesses and to reach a typical secular bear start. Instead, the stock market see-sawed for about a decade. With each decline, it bounced back. As the underlying economy and baseline earnings level grew, the market slowly whittled its P/E back to levels associated with typical secular bull ends and secular bear starts. So it has taken more than a decade to wear away the effects of the late 1990s extremes.


Who says that markets are not considerate? A sudden decline in 2000 would have been a cruel polar bear plunge. Instead, the market tip-toed lower, allowing time for investors to adjust. Some investors have known for over a decade that we are in a secular bear market. Many of them, however, may not have realized just how elevated P/E was when this secular bear began.

Figure 2. Secular Bear Markets

Figure 2 shows just how far we had to go. P/E is on the left axis; time is across the lower axis. The chart presents all of the secular bear markets from the past century. The format is similar to that in Figure 1.

Pause for a moment to reflect upon Figure 2. Contrast it back and forth with Figure 1. Every secular bear cycle prior to our current one followed a secular bull that ended with P/E in or near the red zone. That set the starting point for every adjacent secular bear. But this time, the super secular bull of the late 1990s ended nearly twice as high — it was a major bubble. Therefore, it is realistic to expect that our current secular bear might last a lot longer or be twice as gnarly as past secular bears.

Because the Fed and other factors have kept the economy in a state of relatively low inflation, the current secular bear has ground its way back to the reality of the red zone.

What goes up, must come down. Figure 2 is noteworthy for highlighting the lofty start of the current secular bear. Now after almost fourteen years, the market P/E is down, but only into the red zone. That level, however, is not overvalued. It was overvalued in 2000 and at many points over the past decade. There were not plausible economic and financial conditions to justify P/E near 30, 40, and more.

Now, finally, the stock market is fairly-valued for conditions of low inflation and low interest rates (assuming average long-term economic growth in the future). But what about the future? If inflation remains low and stable indefinitely, then this secular bear will remain in hibernation until the inflation rate runs away in either direction.

A period of hibernation, however, does not cage the bear and allow a bull to roam. Rather, it means that investors will receive returns consistent with relatively high starting valuations — nominal total returns for the stock market of around 5%-6%. Hibernation avoids the declining P/E of a secular bear. It is the decline in P/E that causes secular bears to deliver near zero return.

Hibernation also means that there is almost no chance of better returns. Average and above-average returns require a significant increase in P/E. From the red zone, higher P/E requires an irrational bubble. That is never a prudent assumption for a financial plan.


The economy experiences periods of rising inflation, disinflation (i.e., declining inflation), deflation (i.e., negative inflation), reflation (i.e., increasing inflation inside of deflation), and price stability (i.e., low, stable inflation). The periods run in a natural sequence around the starting point of price stability.

To illustrate, the cycle starts with low inflation. Then, due to excess money supply growth or other factors, the inflation rate rises. At some point, economic policies or factors reverse the trend, thereby starting a period of disinflation (i.e., declining inflation). Once back at price stability, the trend can either hold in a state of low inflation or it can move upward or downward across another cycle.

The P/E for the stock market is driven by the trend in and level of the inflation rate. As a result, there is a cycle for P/E based upon the inflation-rate cycle. High inflation and deflation drive P/E lower. Price stability drives P/E higher.

The P/E cycle creates secular bull and secular bear markets. Some secular periods have been long, yet others have been relatively short. Time does not drive secular periods. Rather, the inflation-rate cycle determines whether they will be relatively quick or quite extended. Inflation-rate trends can last a few years or they can extend for decades.

Secular bull markets transition into secular bears, which are followed by secular bulls. Neither secular bulls nor secular bears are isolated periods. Instead, they necessarily precede and follow each other. This is why they are designated as cycles rather than simply as periods.

They are called secular because they have a common characteristic and driver that extends over an era. The term secular is derived from a Latin word that means an era, age, or extended period. Actually, an original Latin variation of the word has been closer to hand than most people realize.

On the back of the American one-dollar bill is the Great Seal of the United States. One part of the seal is the circle on the left-hand side bearing a pyramid topped with an eye. Look closely under the pyramid: there is a banner with the phrase “novus ordo seclorum.”

In 1782, Charles Thomson, a Founding Father of the United States, and secretary of the Continental Congress, worked as the principal designer of the Great Seal. There is extensive symbolism included in the seal. When Thomson proposed the seal to Congress, he described the meaning of novus ordo seclorum as “the beginning of the new American Era.”

When the word secular is used to describe stock market cycles, it expresses that the cycle is an extended period with something in common throughout. Secular bull markets are extended periods that cumulatively deliver above-average returns. These periods are driven by generally rising multiples of valuation as measured by the price/earnings ratio (P/E). Secular bear markets are the opposite: extended periods with cumulative below-average returns driven by a generally declining P/E for the market. Thus the secular aspect of these periods relates to the generally rising or falling trend in P/E over an extended period of time.


If history is a guide, the inflation rate will at some point trend away from the present price stability. The result will be a significant declining trend in P/E. If this occurs over a few years, the market losses will be dramatic.

More likely, it will take a decade or longer. That will enable the underlying economy and baseline earnings to grow, thereby offsetting the decline in P/E. As we have seen from history, that means another decade or longer of near-zero returns.

When the adverse inflation-rate trend reaches its nadir, we will mark the end of this secular bear and the start of the next secular bull. As the economy or the Fed reverses the adverse inflation-rate trend back toward price stability, P/E will trough at its lows and begin the long climb that drives secular bull markets.

These processes take many years. Be careful not to let hope for the next secular bull mask the reality of the current secular bear. Many more years of vigilant investing will be required for portfolio success. As Robert Frost so aptly wrote:

The woods are lovely, dark, and deep,
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.

Ed Easterling is the author of Probable Outcomes: Secular Stock Market Insights and award-winning Unexpected Returns: Understanding Secular Stock Market Cycles. He is President of an investment management and research firm, and a Senior Fellow with the Alternative Investment Center at SMU’s Cox School of Business, where he previously served on the adjunct faculty and taught the course on alternative investments and hedge funds for MBA students. Mr. Easterling publishes provocative research and graphical analyses on the financial markets at

Category: Cycles, Markets, Think Tank

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.

16 Responses to “This Secular Bear Has Only Just Begun”

  1. chartist says:

    What rubbish…At first, I thought the article was talking about treasuries….As long as the Fed has the market back stopped, this bull continues….Wake me when Ford reaches $30 or Noble reaches $90.

    • The idea of guest posts is to overcome our own confirmation bias by posting commentary or academic research that may disagree with our existing views.

      Holding aside your predictions on those 2 stocks, what exactly is it that you disagree with in Ed’s piece ?

      • tball says:

        I don’t know what chartists’s reservations are, but it seems to me it’d be difficult to have an inflationary period with demand so low and employment so weak. And I see no will in DC to improve that through smart policy decisions. Janet Yellen seems to have the right mindset but the Fed can’t really fix this on its own.

  2. [...] This Secular Bear Has Only Just Begun Big Picture [...]

  3. Moss says:

    Not sure the P/E range triggers can be counted on in this current era. The percentage drop of P/E’s from the 1999 high is mind numbing. 45 to 15. In my mind the Central Banks do not want deflation, they are the 800 pound gorillas. Had they not intervened to the scope they did then the March 2009 P/E probably would have gotten down to the range. Now even the taper is postponed.

  4. catman says:

    I was wondering when this topic would come up. BR if memory serves was keeping this ball in the air some time ago. Ed’s speculations are too epic for me. Personally I think that if you waded in when the tide was out in early 2009 you may have picked up some bargains that will weather even the dreaded SB. Beyond that it’s all tactical.

  5. BCWM says:

    Ed’s logic isn’t really all that sound. One major aspect of his argument rests on the fact that “…the super secular bull of the late 1990s ended nearly twice as high — it was a major bubble. Therefore, it is realistic to expect that our current secular bear might last a lot longer or be twice as gnarly as past secular bears.” This is simply faulty logic. The graphs even show that the starting PE has nothing to do with the ending PE. He also doesn’t provide any data one the correlation between inflation and PE which would strengthen his argument.

    Also, while I enjoy the history lesson, it is slightly out of place and seems to simply be a distraction so that he doesn’t need finish his actual argument.

  6. droubal says:

    These concepts are not new, they have been around for years and do make sense. It is not only about P/E.
    There are a number of structural problems that need to be resolved until the economy can take off.
    Health care is too expensive, employment and income for a large sector of the work force is not improving. The middle class has taken a big hit and will have a difficult time retiring. Many are now postponing retirement, leaving fewer openings for younger workers. Household formation and home purchases are down. Family sizes are smaller and women are having children later. Cars are older and fewer miles are being driven.
    This is not a picture of a vibrant, growing economy and these issues are not being resolved. In addition to solving these structural problems, I think we need to see economic growth that is faster than debt growth. That isn’t occurring either and hasn’t been for a long time.
    If we had a major bull market now, P/Es would be heading back up to the 40s again. Is that likely?
    I personally don’t think so.

  7. SumDumGuy says:

    While I agree with chartist about the article, I suppose, for me, the more interesting topic would be, suppose if the article was true, then how should I game plan my portfolio? Where would I want to be invested?

  8. Init4good says:

    Interesting for sure. My only “but” is .. if periods of rising inflation, disinflation (i.e., declining inflation), deflation (i.e., negative inflation), reflation (i.e., increasing inflation inside of deflation), and price stability….are the driving factors, would it not make the most sense that these measurements would need to be taken using the same ruler? IOW, if the definition of inflation/etc is measured one way in one period of a secular bull or bear, and then measured another way during a different time period of the same secular bull or bear, isn’t the whole idea based on faulty measurements?

    The units of measure must be the same if you want a true comparison, and I don’t think that can be done over such long periods of time…

  9. couragesd says:

    Maybe I am a lemming….I really enjoyed the article. It was well thought out and argued. I would have to investigate the underlying numbers more. Not that it matters, but I have been a proponent of a 3-5 percent growth for awhile. although double digit returns sure to feel good!

    I have also been contemplating how the different fund and pension managers are going to explain away the next few years of low growth. They built their reputations on the huge growth in the previous decade and now they are in the prime of their careers. They won’t be able to blame low growth on the great depression, 9/11, financial derivatives. Perhaps they will try and force another bubble. When will we hear the new rallying cry “Bubbles are good”? There is going to be action on shakedown street.

  10. bonzo says:

    Rising inflation alone won’t strongly drive stock prices down. Inflation had a big effect in the 1970′s because the stock market then was dominated by industrials using FIFO inventory accounting and with big depreciation charges, resulting in phantom profits during a period of rising inflation. Mix that with high tax rates on profits (whether at the corporate level or on dividends, recall that dividend payout ratios were higher then and more stocks were owned by taxable rather than tax-exempt entities then) and you have a disaster. All that has changed nowadays.

    What would crush stocks now is high real rates of interest and/or falling earnings. I doubt we’ll see high real rates of interest for a while, because I think the Fed will be forced to stick with ZIRP for another 5 to 10 years. But falling earnings is another story. Falling earnings is what caused the 1901-1920 stock market decline. I’m not sure exactly what was going on then. Corporate profits in 1916 were unbelievably high due to WWI. If I’m not mistaken, they didn’t reach the 1916 level again until sometime in the 1990′s in real terms. Corporate profits are likewise very high now due to big deficits and continued low household savings rates. This is what you want to watch out for. If profits mean revert to say $80 on the SP500 (a 30% or so drop from where they are now), then fair-value is 1200 based on a PE of 15. But a drop from 1700 to 1200 would likely cause panic among the short-term-oriented momentum investors, who dominate the market, and lead to an undershoot. I wouldn’t be at all surprised by the SP500 breaking through 1000 again, though I’m not going to hold out for that. My target is 1300 and I’ll buy big if and when it breaks that level.

    In the meantime, because the Fed has my back with ZIRP, I’m not too worried about my intermediate-term bonds, regardless of inflation.

  11. Hammer of Thor says:

    Ed’s charts have proven that you cannot use historical data to accurately predict the future. Figure 1 shows average range for bull ends and bear starts, yet the blue line for the last bull market extends 22 points above the average. This leads to Figure 2, where he shows that previous bears ended with a much lower P/E than the current market has, but considering that the previous cycle pushed the P/E so high outside of the box, isn’t it possible that this market bottomed higher?

    I’d also like to know from Ed at what point would he say, “we are actually in a secular bull market, and I was wrong.”

    • noncist says:

      I agree with Hammer of Thor, the structure of the markets has changed, so historical data cannot accurately predict the future. The article was very interesting and well written though.

      P/E may have shifted upward permanently thanks to greater access to markets for more capital with proportionally fewer underlying securities to invest in. Taken on its own, this would seem to be inflationary, but there is a strong deflationary counter in the cost of goods, energy, and transportation to consumers and businesses.

      The P/E is high because there’s a lot of money with nowhere else to go which was not as much the case in the past. In the long run, I suspect the strength of this effect will continue to compound assuming that long term market returns are positive at all (whether 10%, 5%, or 1%). Call it P/E inflation. . .

  12. LeftCoastIndependent says:

    Just to comment on your quote of the day, Money can’t buy you happiness, but neither can poverty, and I’ve done them both.

  13. [...] This is a good piece on secular bull/bear markets from Ed Easterling  on Barry’s blog. [...]