The last twelve years has seen
the S&P 500 go from a high of 1552 in March of 2000 to a current level of
1404, as of this writing. Yes, if you factor in dividends, the stock
market has made money over the past twelve years, but to see negative nominal
growth is still frustrating. To have this happen for such a long period
of time makes us all realize that we are in a secular bear market, which is a
long term downward or horizontal movement in the market. If you put
inflation into the equation, your money in 2000 was worth considerably more than
it is today, which is a double whammy after getting no nominal growth in that
time period.
Of course, many financial
planners and wealth managers will argue that we have made it through the crap
of 2008 and that we are on our way to new highs. Well, apart from the
fact that if they didn't say that, they may lose clients, this is somewhat
erroneous based on history. While that MAY be true, history has proven to
show otherwise. Let's first discuss the non-data related information.
The average secular bear or bull
market lasts 17 years. Since 1877, here are the secular highs and lows
(adjusted for inflation) to show the kind of returns we have seen (this
information is pulled from DShort.com).
As you can see, the time frames
have been pretty wide ranging but the one of concern to me is the 1929 crash
that didn't yield a start to the new secular bull market until 20 years
later. The 1929 crash was one that was caused by similar financial
circumstances as the 2008 crash we had recently as well as the irrational
exuberance we experienced in 2000 from the technology sector. Also, as
you can see, the March 2009 low was 59% below the secular bull peak of 2000…in
relation to other levels we have hit in the past, it is the second lowest
dip. Now, does that say anything really? Not really, but why would one of
the biggest peaks and crashes in history "only" yield a 59% drop when
others have been well over 60% and the most comparable crash even reaching
81%? Again, it is speculation, as is most market timing, but still
interesting to look at.
Another interesting factor to
assess where the market would have to go before we hit a bull market: The 10
Year Price/Earnings Ratio. This is a calculation of the average P/E of
the last 10 years. It was created to even out the highs and lows of
Price/Earnings ratios over a 10 year period to see a longer term health of the
market. Right now, our 10 YEAR P/E ratio is at 20.9 as compared to a historical
average of 16.4. This is a cause for concern because even at the
"bottom" of our crash in March of 2009, the 10 YEAR P/E only hit
13.3, which was still below the historical average, but not quite as impressive
when you see that we lost 50% of our value so quickly.
The actual interesting point in
this analysis is that in all the secular bear market bottoms in 1921, 1932,
1942, and 1982, the 10 YEAR P/E hit single digits (less than 10). We are
currently at 20.9! So does this mean the market has to fall in half
again? The bull market analyst would say that earnings can just increase
to eventually even this out, but that never happens. It will probably be
a combination of both earnings increasing over the next few years as well as
the stock market oscillating in a certain range of pricing.
Now, if you look at the current
Trailing Twelve Month P/E Ratio, it currently sits at 14.9 which is below the
historical average of 15.1. This is a positive for the bulls but it
doesn't mean that you're going to make crazy money investing today. The good
news I see from this is that if you are looking LONG TERM, you will probably do
pretty decent over a 20-30 year period if you invest dollars today. The
other information I stated above tells me that you should be expecting some peaks
and valleys along the way, but again, if you're in it for the long haul, don't
worry. It will work out in the end. Keep buying high dividend paying
investments so that you can get some returns from the companies you invest in
apart from the emotional ups and downs of the stock market.
From all indications we can see,
I wouldn't be able to say when a new secular bull may start, or even if it
hasn't started yet. All I can say is that I personally don't have 100% of
my money in stocks, but I also don't have 25% in stocks. I have a nice
blend of stocks, cash, and bonds, even though I am able to weather the long
storm of up and down markets.
About
the Author:
Paul
Gabrail has been investing since he was
13 years old. He specializes in real estate and co-owns over 800 rental unit
properties and $60 million in assets. Paul blogs at www.thecapitalistmanifesto.com.
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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