Wednesday, April 15, 2009

Best strategy for long bear market 2010-2020

Mr. Farrell may be more bearish than necessary. We date the beginning of the secular bear* market to the first quarter of 2000 and use the DJIA's 11,722 close on Jan. 14 of that year. The Nasdaq hit it's all-time high on March 10.

We consider all of the time the market spent above that figure, starting with the Oct. 30, 2006 close at 11,727 through the all-time closing high 14,164.53 on Oct. 9,2007 (coincidentally, five years to the day* from the low of the bust) and back down, to be an anomaly caused by Greenspan's loose-as-a-goose Fed policy. You could probably make the same argument for a portion of the 2004-2006 gains. One more factoid, the 2007 high did not exceed the 2000 high, on an inflation adjusted basis.

The last secular bear is dated 1966 to 1982, eighteen years, roughly equal in length to the 1902-1921 secular bear. For reasons I'll get into in a few months, we believe this cycle will be a bit shorter, call it approximately 15 years, which gets us to 2015 or so.

The big caveat is that the politicians don't screw up the economy. The recently passed stimulus bill is estimated by the CBO to decrease future economic growth by 0.2% per year beginning in 2014. We couldn't take any more of this kind of stimulus without seriously harming future GDP growth.
This has gotten to be a long-winded introduction, here's the story from MarketWatch:

Bonds beat stocks by factor of 11 from 1981 to 2009, but can it continue?

Never buy stocks. Never. Unless, of course, you love gambling (and losing) at the Wall Street casino. Or you don't mind making payments on your broker's BMW. Or you just joined a monastery and just took a vow of poverty.

Otherwise, don't buy. Stocks are losers.
At least that's the only rational investment strategy you'll come away with after reading economist and long-time Forbes columnist Gary Shilling's analysis of the miserable performance of stocks during Wall Street's recent bull/bear cycles, beginning with the election of President Reagan in the early 1980s....

Bonds beat stocks by factor of 11 times from 1981 to 2009
Yes, and you'd have been 11 times richer. Listen closely to Shilling's analysis of the past 28 years. In his Insight newsletter he compares the performance of the S&P 500 stock index to the bond market. First he focuses on his "all-time favorite graph" comparing "the results from investing $100 in a 25-year zero-coupon Treasury bond at its yield high (and price low) in October 1981, and rolling it into another 25-year Treasury annually to maintain that 25-year maturity."
His bottom line: "On March 31, 2009, that $100 was worth $16,656 with a compound annual return of 20.4%. In contrast, $100 invested in the S&P 500 at its low in July 1982 was worth $1,502 last month for a 10.7% annual return including dividend reinvestment. So Treasurys outperformed stocks by 11.1 times.">>>MORE
*Another coincidence, the first leg of the big 1982-2000 secular bull was also five years in length, missing being exact by 13 days: DJIA 776.92 on Aug. 12, 1982 to 2722 on Aug. 25, 1987.

We've been posting on the fact that coming out of this cyclical bear still leaves us with the secular variety for six months or so. Here are some previous posts, in reverse chronological order:

Why Stocks Won't Come Out of the SECULAR Bear Market Any Time Soon
Death of the American Dream? (nah)
Where in the Bear are We?
S&P 500 Erases Half its Rally Since November in Bearish Signal
The Mathematics of Losing Money
Julian Robertson: US To Face Poor Economy for 10-15 Years (And Warren Buffett Stops By)