For several years I have asserted that the US Stock markets would endure a prolonged cycle of extraordinary volatility and below average returns. In financial circles, these cycles are coined “Secular Bear Markets.” Anyway, my conviction that we were in the midst of a secular bear market was so strong that I published that belief indelibly into the Philosophy section of my blogsite when I took it live in late 2005. Under Belief #4: Market Cycles Are Real, it reads:
“Capital markets tend to move in 15-20 year secular (long-term) cycles. Since 1900, the U.S. stock market has enjoyed 3 secular bull cycles that were characterized by superior returns and endured 3 secular bear cycles that were characterized by lackluster returns. In each of the secular bull cycles, P/E ratios peaked in the low 20’s and in every secular bear cycle, P/Es bottomed in the 6-8 range. Bond markets also tend to experience similar cycles. We believe that we are in the early stages of a secular bear market for U.S. stocks. We are also concerned about the prospects for the domestic bond market. The current climate for U.S. capital markets may prove challenging for buy and hold investors.”
The Catamount blogsite went live on September 15, 2005. On that day, the S&P 500 opened at 1227. Almost 6 years later the S&P 500 is at 1119 . Of course, as of that publication, I believe we were already more than 4 years into the current secular bear market which officially began in March of 2000. That means this bear may already be 11 years old. If the typical bear market lives 15 years, it is entering the later stage of its life cycle. When it ends, a new secular bull market should begin and this will usher in an extended period of above average returns on stocks.
With that said, new bull markets don’t typically begin until P/E ratios bottom near 7 or 8. We’re not there. The markets have not properly priced in the structural economic problems facing our country. I believe markets will eventually reflect reality. Perhaps the recent market action is signaling that next stage of cleansing is underway. The S&P slid 17% wiping out $ trillions in the last 30 days. In the absence of further central bank and government interventions (i.e. quantitative easing or TARP), I expect the markets to head significantly lower albeit not in a straight line.
Until circumstances change, investors who are heavily exposed to stocks might be well advised to sell the rallies. Of course, it should be quite clear by now that Catamount is, and will remain, agnostic about the direction of the capital markets until fundamentals prescribe a long-term directional bias. Our investments are performing well under pressure and we continue to carefully scale into attractive alternative strategies and private placements.