Monday, June 15, 2009

Markets: Is This Bull Cyclical or Secular?

It is an up move in a secular bear market, a point we've been making for a while. I'll link to some prior posts below the headline story, today's Wall Street Journal Heard on the Street column:

Many investors are now calling the rebound in stocks since early March the start of a new bull market. But it could be only a temporary respite from a longer-term bear market dating back to the beginning of this decade.

If the market is poised for a multiyear run, investors can be more aggressive about diving into stocks. If the bear market will regain its grip on stocks and send prices lower again, investors need to be cautious.

Historical data and the still struggling economy seem to point to the latter case, called a cyclical bull market in a secular bear market.

For now, stocks are fully in bull-market territory, even if it doesn't feel that way given the losses that many investors are still nursing.

After falling 33.8% last year, the Dow Jones Industrial Average finished last week 34% above its 12-year closing low on March 9. The Standard & Poor's 500-stock index is up nearly 40% from its low on that date.

The traditional definition of a bull market is a 20% gain from a low point and a bear market is a 20% decline from a high. But the Dow remains 38% below its record close in October 2007, and the S&P is nearly 40% below its record.

Even those who believe a more stable economy and lots of cash sitting on the sidelines will send the market higher remain cautious....

...In late 2001, Ned Davis Research, a market analysis and money-management firm, raised the idea that stocks had entered a secular bear market, a long period of flat or declining stocks. That idea gained traction last autumn as stocks fell below levels of a decade ago.

Ned Davis considers this the fourth secular bear market since 1900. The last one, from 1966 to 1982, ended when the Federal Reserve moved to aggressively crush inflation.

These "secular" cycles run for long periods; secular bull markets have lasted from six to 24 years and bear markets 13 to 16 years.

Within those cycles are many more cyclical bulls and bears -- nearly three dozen of each since 1900. (Ned Davis uses its own criteria for a cyclical bull or bear market, based largely on 30% moves.)

During a secular bull market, the cyclical, or shorter, bull markets within them gained 110% on average and lasted nearly three years. Within secular bear markets, however, the gains in cyclical bull markets averaged 64% and generally were over within a year and a half....

...Neuberger Berman's Mr. Pedowitz has a word of caution for investors. "Make absolutely sure you have been humbled enough by the markets to know that you can't really tell if this is a cyclical or secular bull market.">>>MUCH MORE, including chart.
HT: MarketBeat who concludes: Let’s be careful out there.

Secular bear markets are characterized first by the initial decline and then by P/E multiple contraction.
During the last secular bear, 1966-1982, the cyclical bear of '73-'74 had a S&P 500 trailing four quarters P/E of 6.97 for the quarter ending 9/30/74 while the '80-'82 cyclical had a P/E low of 6.68 for the quarter ended 3/31/80. One of my favorite Warren Buffett quotes:
December 31, 1964: DJIA 874.12
December 31, 1981: DJIA 875.00

“Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.”
-Warren Buffett

That’s a secular bear market.

Some of our prior posts on the subject:

Oct. 22, 2008
Julian Robertson: US To Face Poor Economy for 10-15 Years (And Warren Buffett Stops By)

Oct. 25, 2008
The Mathematics of Losing Money

Nov. 24, 2008
Of Bulls, Bears and Rallies

Dec. 9, 2008
Fears of a million layoffs a month in corporate America

Feb. 2, 2009
Where in the Bear are We?

Our two guiding principles right now, are:

Anything past settlement date is long term.
Anything long term is terminal.

Even when we come out of the cyclical bear we will still be in a secular bear market (i.e. the red bars)**. From Crestmont Research via The Big Picture:

Dow Chart with P/E, 105 Years
click for larger chart


Mar. 11, 2008
Death of the American Dream? (nah)

April 15, 2009
Best strategy for long bear market 2010-2020

May 1, 2009
Gail Dudack on What's Ahead for the Stock Market