HowWealthWorks.com

[Suresh]

Understanding Secular Bear Markets: Concerns and Strategies for Financial Planners
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According to Crestmont Research, which is a highly recommended source of information on secular market cycles, there have been eight secular market cycles since 1901, not counting the 2000–2005 market cycle, as shown in Table 2.¹





Planners steeped in the Ibbotson statistics, which express historical market returns in terms of rolling period returns in different time series from 3 to 20 years, may be surprised at the dispersion of stock market returns when viewed in the context of secular bull and bear markets. Data from Crestmont Research analyze the price data for the Dow Jones Industrial Average (DJIA) within these cycles in Table 4.





Unfortunately, the facts about secular market cycles do not easily fit into the strategy of passive strategic rebalancing. Optimizer inputs that are derived using long-term average returns will not reflect the wide and significant differences in expected asset class returns during secular bull or bear markets. For example, the typical suggested input for an optimizer using historical data is currently about 10 to 11 percent for U.S. large-cap equity returns, and approximately 5 percent for U.S. bonds. These are roughly the same inputs planners have used for these asset classes over the past 20 years, despite the fact that the market has substantially deviated from them in recent years.
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Robert D. Arnott and Peter Bernstein published a paper ..., titled "What Risk Premium Is 'Normal'?" they comment on investor perceptions that stocks "normally" produce an 8 percent real return and have a 5 percent risk premium over bonds:

...the long-term forward-looking risk premium is nowhere near the 5 percent of the past; indeed, it may well be near-zero today, perhaps even negative. ... Similarly, the long-term forward-looking real return from stocks is nowhere near history's 8 percent. Our argument will show that, barring unprecedented economic growth or unprecedented growth in earnings as a percentage of the economy, real stock returns will probably be roughly 2–4 percent, similar to bonds. Indeed, even this low real return figure assumes that current near-record valuation levels are "fair," and likely to remain this high in the years ahead. "Reversion to the mean" would push future real returns lower still.

Arnott and Bernstein's 2002 paper suggested that the market was still at "lofty" levels at that time. There has only been one secular bull market that began with a P/E ratio above 10 (1933–1936, with a beginning P/E of 11). Now that it is three years later since Arnott and Bernstein's paper, the P/E ratio for the S&P 500 Index is in a range between approximately 19.8 and 15.4 times earnings, depending on whether the planner uses forward or trailing earnings and determines earnings using operating, GAAP, or S&P core earnings for their P/E calculations.
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[R]elying solely on a passive strategic portfolio designed to produce near-benchmark returns in a secular bear market will do nothing but guarantee that clients will underperform long-term expectations for an extended period of time and make it likely that they will fail to achieve their financial planning goals. In a secular bull market, like the period from 1982 to 2000, active investment strategies were not necessary to achieve goals—benchmark returns were more than adequate to achieve the desired and required long-term rates of return. In a secular bear market, however, employing active investment strategies like the ones discussed here, in combination with other financial planning recommendations, may be the only route by which clients can actually succeed.
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Kudos to Messrs Solow and Kitces, who advise against the passive investing portfolio management that has been espoused over the past 20 years and continues to be espoused by the mainstream media. For your additional consideration, they note and compare various bear market strategies.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

It works until it doesn't
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[Rob Peebles provides his take on the above article by Messrs. Solow and Kitces. As support, he uses stock market cycle analyst Ed Easterling's work to take a shot at Yale Professor Roger Ibbotson, who predicted 10% average equity returns over the long haul].

Ed Easterling, renowned chronicler of secular bull and bear markets and world class number cruncher, has some interesting insights into the Ibbotson equity numbers. In an article that appeared on this website last fall, Ed acknowledged that the annualized total return from stocks from 1926 through 2004 was sure enough 10.4%. And, yes, the period under consideration was “long term.” But Ed’s sharp eye noticed that stocks in 1926 were much cheaper than in 2004. PEs started the period at 10.4 and wound up at 20. That PE expansion accounted for 0.9% of Ibbotson’s 10.4% long term return from stocks. Since PEs are still high, investors banking on continued multiple expansion to drive stock market returns are more optimistic than American Idol competitors.

Similarly, Easterling notes that the dividend yield averaged 4.5% over Ibbotson’s measurement period. With yields today closer to 2.5% (at best), that’s another 2% we can lop off the 10.4% historic return. That takes our best case return below 8%. And if PEs contract, rather than remain at today’s elevated levels, annual returns will fall further, even if the period under consideration is a long one. The way Ed sees it, the only way for a new secular bull market to begin is to start from lower valuation levels. And that means slogging through a secular bear market to get there.

What does all this have to do with asset allocation? If the odds are that stock market returns will come in lower than "average" over the next several years, then expectations for portfolios with traditional equity asset allocations will have to come down. Either that or the odds will increase that return objectives will not be met. That makes Solow and Kitces wonder if the traditional allocation model should be altered, either by including new asset classes or by moving away from a buy and hold equity strategy.

Just because something worked for 18 years, doesn’t mean it will work for another18.

Secular Cycle..............[Average annual Return for ]DJIA Stocks
1901-1920 (Bear)......................................0.1%
1921-1928 (Bull)......................................19.5%
1929-1932 (Bear)....................................-33.1%
1933-1936 (Bull).......................................31.6%
1937-1941 (Bear)......................................-9.2%
1942-1965 (Bull).........................................9.5%
1966-1981 (Bear)......................................-0.6%
1982-1999 (Bull).......................................15.4%
Secular Bear Average.................................-4.2%
Secular Bull Average...................................14.6%
Source: “Unexpected Returns,” by Ed Easterling
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Suresh

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[Suresh]

Relationship of Inflation and Price/Earnings Ratios (1900-2005)
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Suresh

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[Suresh]

Secular Bull & Bear Markets Profile
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Suresh

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[drbubb]

The reliable 4 year cycle is scheduled to bottom later this year, or early 2007.

Best guess would be: Oct. 2006

Some are selling already:
http://www.gmstechstreet.com/cgi-bin/webbbs_gmspublic.pl?read=74026

[Suresh]

Welcome aboard, drbubb!

Dave and I were just talking about the 4 year cycle yesterday, as it may relate to our asset allocations in our tax-deferred accounts (which have a limited number of possible investment vehicles).





Currently, some of our money is in Euro-Pacific equity funds to play the depreciating dollar. If the 4 year cycle is to bottom in October as you suggest, we were discussing whether there is merit in rotating the money in the Euro-Pacific equity fund into a S&P 500 index fund before October, say in the August/September timeframe. What do you think?
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[drbubb]

OBSERVING the 4-year Cycle

Semiconductors (SMH and SOX) are a good place to observe the machinations in the 4 year cycle.


The above chart shows the long triangle that SOX has traded in. 4-year cycle timing suggests that it is set to break soon- on the downside. But the OBV measure is surprisingly strong, and suggests a move upwards soon.

A close-up of shorter cycles suggest that there may be time for at least one more rally, running into July.
Daily SMH ... update : 1year

The Oct.2005 low was just below SMH-33.00.

Looking Back
Intel (INTC) was a good bellwether for the prior 4-year cycle lows:


...MORE on the 4-year Cycle: http://www.greenenergyinvestors.com/index.php?showtopic=56

[Suresh]

Secular Stock Markets Explained
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Ed Easterling was kind enough to let us run his chart, and I find it to be the very best of these longterm secular views: He overlays the Bull and Bear periods with trailing P/E -- this fits in very nicely with our contracting P/E thesis.





Barry Rithholz's 100 year DJIA chart:





The post Bull/Crash refractory period (as I like to call it) has been shown by a variety of studies -- I recall one by Ned Davis -- typically last about 2/3rds as long as the prior Bull market lasted. That suggests this period should end sometime around 2012.
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

—THE CYCLES—
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There is a fabulous market newsletter called Growth
Fund Guide ( PO Box 6600,Rapid City, SD 57709), edited by
Walter Rouleau. ...

In his latest edition of Growth Fund Guide, his front page table shows some significant statistical conclusions regarding the 4 year cycle. The table goes back to 1896 and presents statistical data for the past 27 four year election cycles. There is a plethora of interesting information in the 4 year cycle table, but we will try to hit upon a few highlights.

The historical average of all Dow Jones Industrial Average 4 year cycle declines is 32.8%. We should emphasize that that is the average decline. There has never been a 4 year cycle decline less than 9.7% (1994) and the greatest percentage decline was 86.0% in the decline which ended in July 1932. One of the most consistent statistics is that, since 1962, all four year presidential cycle bottoms occurred in what is called the Mid-Term election years with the exception of 1987, the year of the crash. That means there is a strong statistical suggestion that 2006, a Mid-Term election year, will see an important market bottom. Another truly impressive statistic from the Growth Fund Guide table is that the average rise out of the four year presidential cycle bottom produces gains of 97.4%. Rouleau points out, however, that the cycle bottom which occurred in October 2002 has so far produced a gain that is well below average (+ 54.2%). He goes on to state that all four year presidential cycle rises are likely to continue to be below average until the U.S. market once again becomes extremely undervalued. He hazards the guess that the upcoming 4 year cycle bottom is less likely to reach extreme undervaluation than the next 1 or 2 four year presidential cycle bottoms that follow.
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_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

4 Year Presidential Cycle
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Average S&P 500 Performance During Year Two of a Presidential Term: 1962 - 2006





Source: Birinyi Associates, Inc.

We've discussed this phenomena many times in the past; Note the big failure year for the cycle was 1986, with the correction low postponed to 1987.

Birinyi Associates observes:

As the table [below] details, there is some truth to this theory as the second year has been the worst of the four-year cycle in over half of the 11 full cycles since 1962, and it is the only one with an average negative return. We also plotted the YTD performance of the S&P 500 this year vs. the average second year return since 1962. As the chart (above) shows, there is a good degree of similarity between the patterns of this year vs. prior years.





UPDATE June 28, 2006 5:58am

Some skepticism about the 4 year cycle leads me to show these additional charts and table. Note that the 2nd year low presents an unusually good buying opportunity:

Table: 1919 - 1998





This chart runs from 1950 to 1998; I find it rather persuasive:

[The S&P 500 overlayed against each President's term, 1949 -1996]

_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Time to Rebalance Portfolios
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Long investment time-frames of 50 to 100 years may work for institutions or multi-generational family wealth, but they do not apply to individual investors. Most individuals have only about 25 years - typically between ages 40 and 65 - to build their investment portfolios. Because financial markets are cyclical, lasting approximately 20 years, each asset class (stocks, bonds, real estate, commodities and precious metals) experiences its own bull and bear market cycles. Accordingly, it is critical for individuals to identify which asset classes are likely to outperform during the current cycle, and adjust their portfolios accordingly. Failure to do so may necessitate postponing retirement, or having to make do with a lower standard of living during retirement.

Holding an asset class after a cyclical trend change has occurred has not been profitable for investors in the past. Assuming the 25-year portfolio-building time-frame previously referred to, an investor aged 50 during the stock market boom that ended with the crash of 1929 waited until 1954 just to break even. In real terms, using the Consumer Price Index (CPI) to measure inflation, that investor did not break even until 1958, at 80 years of age.



During the immediately preceding bear market cycle in equities that started in 1968, the Dow exhibited significant volatility but nevertheless ended at 985 in 1982 - the same level it attained in 1968. Because this was a high-inflation period, it would have taken until 1995 to break even if the Dow's performance was CPI-adjusted. An investor aged 50 in 1968 would have been 77 before breaking even in 1995 and, more importantly, would have missed one of the greatest commodity booms ever experienced. From During 1971 to 1980, gold rose by 2,300%, silver by 2,400% and platinum by 900%, while oil rose 900%.
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Investors who have experienced only one asset cycle find it difficult to abandon the comfort zone of their past investment paradigm and dramatically rebalance their portfolios in order to align them with the new trend. Successful investing requires correctly identifying new trends rather than simply assuming the continuation of past trends. In 1968 it would have been psychologically difficult for most investors to make the switch from equities to tangible assets in order to benefit from the trend change. The previous 38 years were excellent growth years for both the North American economy and the equity markets; the Dow rose from a low of 44 in 1935 and climbed 915% to 985 by 1968. The TSE experienced similar results, rising from 132 to 1,067. Commodities rose modestly during this period because inflation was tightly controlled. There was little or no expansion of the money supply because the US dollar, the world's reserve currency, was backed by gold until 1971. Many investors' only experience with stocks and bonds had been a positive one. Life was good and complacency high. The next 15 years, however, would not be so rewarding for investors who did not recognize the trend change and did not rebalance their portfolios.

Similarly, investors who were overweight precious metals, oil and gas in 1980, and did not realize that a trend change had occurred, did not do well during the next cycle. If they maintained their positions instead of rebalancing to be overweight financial assets, their portfolio suffered.
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Today's situation is similar to that of the early 1970s. Most investors' experience with investing is based only on the last cycle. According to a survey conducted by Investment Executive, most financial advisors have been in the business less than ten years, or the last half of one cycle. During the past 25 years, the North American stock market has experienced one of the longest, highest-running bull markets in history, with the Dow rising 1,100% from 985 in 1982 to 11,723 in 2000, and the TSX rising 489% from 1935 to 11,389. The high-tech NASDAQ delivered even better results, rising 2,100% from 250 to 5,500 during the same time period.

Just as in 1968, today's investors are complacent, and convinced that equities will continue to provide superior returns during the next 20 years. They feel decline experienced in 2000-2003 is behind them, that the worst is over, and they look forward to continuing new highs that will increase the value of their portfolios and provide for a comfortable retirement. What is critically important to understand is that the bull market that began in 1982 is not the norm - it is just one cycle. The next cycle, which should last about 20 years, is unlikely to be a repeat of the last cycle. North American equity markets are more likely to experience a significant correction, or remain in a trading range similar to that of the 1970s, rather than repeat the performance of the past 25 years. A repeat of the past bull market would require the Dow to rise to 140,000 from its current level of 12,000. For those with a with an investment horizon of 50 years, a buy-and-hold strategy today may eventually succeed, but the investor will miss out on a bull market in commodities and precious metals. Baby boomers, however, cannot risk being in the wrong asset class during this cycle.
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Simply holding traditional financial assets during this cycle may prove disappointing at best, and catastrophic at worst. To mitigate the ravages of inflation and insure portfolios against unexpected crisis, investors need to rebalance portfolios with greater weights in tangible assets, with particular attention to oil and gas, uranium, water utilities and precious metals mining stocks.
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If you have a very long investment horizon (e.g., because you are building multi-generational family wealth), then traditional asset portfolio management may not be harmuful. If, in contrast, you are building wealth for your immediate family's financial freedom, then you must know under what conditions a particular asset class performs well. Doing otherwise is like bringing a knife to a gunfight.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Financial Times: When are bulls actually bears?
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Stock market cycles are not to be confused either with economic cycles or earnings cycles (although they interact with both in interesting ways). Instead, the governing theory of Ed Easterling, head of Crestmont Research in Dallas, is that markets follow secular bull and bear cycles. These are determined by peaks and troughs in price/earnings ratios. To avoid confusion with economic and earnings cycles, which markets tend to discount, the key p/e ratios for this task are cyclically adjusted, taking the multiple of prices to average earnings over the preceding 10 years.

Viewed this way, stock markets look more expensive than if we simply look at the multiple of the latest year’s earnings. But the argument goes further than that. According to Easterling, a secular bull market is a period of generally rising p/es that multiply growth in earnings per share, and give investors an above-average return. A secular bear market is the opposite: a period of falling p/es that offset earnings growth and provide below average returns.

These market cycles are longer than economic cycles, and very much longer than corporate profit cycles. By his estimation, we are now in the fifth secular bear cycle since 1901. This uses the (rather limited) Dow Jones Industrial Average, for which constant historical data are available, but it is unlikely that findings for the more robust S&P 500 would be significantly different.

We may have further to fall in this episode than in earlier bear cycles. Previous bear cycles started in 1901, with a p/e (as cyclically adjusted) of 23; in 1929, with a p/e of 28; in 1937, with a p/e of 19; and in 1966, with a p/e of 21. In all bar one, multiples had fallen by more than half by the time the cycle came to an end.

The current bear cycle began in 2000, with a p/e of 42. So on this analysis, we started this decade at historically irrational valuations. Multiples need to get back at least into the teens before a secular bull market can start (and we are currently at a p/e of about 26).

It is also easy to be tricked by a succession of positive years – at one point there were three “up” years in a row during the 1966-1981 bear market – or by new highs, as happened last year.

If there is an external driver for these cycles, it is inflation. Higher inflation will require investors to demand lower earnings multiples. Japanese-style deflation, where reducing prices put long-lasting downward pressure on profits, also pushes down multiples.

The economy is certainly not unimportant, as a slowdown will make it harder for companies to make profits. But this analysis suggests that the current great preoccupation with the risks of a recession is misplaced – at least from the perspective of investment in stocks.

According to Easterling’s calculations, the average annual return on the Dow during bear cycles was minus 4.2 per cent during the 20th century, while the average during bull cycles was 14.6 per cent. Meanwhile, GDP growth was slightly higher during bear cycles (6.9 per cent) than bull cycles (6.3 per cent).
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Then there is the particularly topical issue of the Federal Reserve itself. Possibly the last flood of cheap money from the Fed arrested the fall in stock prices in 2003 at a point when multiples had still not fallen to levels normally needed to start a strong recovery.

On this view, there should be a realisation that the bizarre event of this decade is not the recent return of volatility. Rather, it was the recovery that started in 2003.
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Investopedia has a good breakdown of why rising consumer price inflation rates tamp down earnings multiples.

[Suresh]

Thoughts from the Frontline: What Does a Recession Look Like?
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It is my contention that there are very long term cycles in the stock market. But rather than look at bull and bear cycles in terms of price, we should look at them in terms of valuations. Markets go from high valuations to low valuations back to high valuations, as nauseum. You can measure it in price to book or price to earnings or whatever metric you want. The affect is the same. There has never been a time where markets started out from high valuations that they did not eventually end up with lower valuations. These cycles lasted on average for 17 years, with the shortest being 13 years (so far).

And this is important. There has never been a time when valuations dropped to the mean and then went back up again without visiting a much lower valuation. Never. Not one time. Zip.

We are now back to the mean P/E ratio. Now maybe this time it is different. But those are dangerous words.

Let's take a look at a chart from Dr.Woody Brock, of Strategic Economic Decisions () one of my favorite economists as well as one of the smartest I know.



If you invested in 1999, you are essentially where you were 8 years ago in terms of price. Note that Woody uses the third quarter of 1999 as his comparison, as the market was close then to where it is now. But earnings, as Woody points out, have risen by 110% since 1999. P/Es are now in the 15 range. But I contend they will go lower. How can we get to the low P/E ratios that have prevailed in all previous cycles?

Either one of two ways. The market can drift sideways for a long time while earnings continue to grow, or the market can drop enough to get us to lower valuations. And that is precisely what I wrote in this letter and my book 4-5 years ago. I said it would likely take two recessions (at least) to get us back to low valuations to set up the next bull market where the primary driving factor is expanding P/E multiples. Remember in the last bull market, 80% of the increase in the price of stocks can be explained as the P/E ratio rising from a low of 7 to a cycle high of 42.

If the stock market were to drop 20%, then the P/E ratio gets to 12, assuming earnings don't fall. Of course, they will, but they are also likely to rebound as quickly as they did after the last recession.

Now, let me speculate. Go back to 1974. Were we at the low in terms of valuations at that time? No, the P/E was 11, which is admittedly low, but it was going to 7 in 1982 (note that took another EIGHT years).

But the recession drove the S&P 500 to its cyclical price low, an average of 82, and a relatively young Richard Russell (he was just 48 or so) famously said a new bull market was beginning. It was another 8 years and two recessions until the absolute bottom in terms of valuation was reached, but the price bottom made its entrance in 1974.

Could that happen again? Could this current recession drive the market down enough to set a price low, even though it will take some time for valuations to reach their cycle lows (and who knows what that number is?) That is very possible. There is a buying opportunity in our future.
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_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Thoughts from the Frontline: Warren Makes a Bet
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As I wrote in Bull's Eye Investing (Amazon.com) and occasionally stress in my writing, the long-term returns you get from index fund investing are very highly correlated with the P/E (price to earnings) ratio at the time you make your initial investment. The P/E is price divided by earnings. If the ratio is 10, then earnings are about 10% of the stock price. If the ratio is 20, they are about 5% of the stock price. The higher the price, the less earnings you get for your invested dollar. However, a rising P/E ratio can be a major boost to stock market returns.

If you make your investment when valuations are low, you return is going to be much higher over time than if you make your investment when valuations are high. Look at this graph from South African partner Prieur du Plessis of Plexus:


Prieur divided the S&P 500 into five groups based on the initial P/E ratio and then calculated what the returns would be for the next 10 years, after inflation. He also used a 10-year average of the P/E ratio, to take out the fluctuations caused by one-off events, recessions, etc.

As you can see, and long-time readers should expect, if you invest when stocks are at their cheapest, you can make a remarkable 11% on average for the next 10 years after inflation. As stocks get more expensive in terms of their P/E, returns begin to fall. Real returns for the last group are only 3.2% on average.

We are currently in the range of the highest valuations. If you make the generous assumption that inflation will be 3% over the next decade, you are talking about a 6% total return, based on historical averages. Not bad, but not what a lot of investors are hoping for. Remember that 6% number, as we will revisit it in a moment.

One of my basic premises is that we need to look at markets in terms of valuation and not just price. Markets go from high valuations to low valuations and back to high. The round trip can take the better part of 30-40 years. These are long-term secular markets, and they are mean-reverting. By that I mean that markets will go both well above and well below the long-term mean average over time.
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Look at the following charts from Vitaliy Katsenelson (author of the most excellent book Active Value Investing, and one I recommend to anyone interested in value investing. Amazon.com)

Again, these are 10-year trailing P/E ratios. Notice how the P/Es always go back below the average? And we are a long way from the average now. There are two ways that we can get back to low P/Es. Either the stock market can go down or earnings can go up faster than prices (or some combination thereof). The stock market bottomed in 1974 in terms of price, but in terms of valuation the market took another eight years to get to its low. Then in 1982, with valuations below 10, the stock market was a coiled spring ready to explode.


Let's look at one more chart from Vitaliy. This chart shows the one-year trailing P/Es. Today, if you go to the S&P 500 tables at Standard and Poor's, you find the current P/E ratio is a heady 22, with the long-term one-year average being 15.2. There is a long way to go before we get to anything we can call mean reversion.

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One more thought pointed out to me by Woody Brock: National wealth is a mean-reversion machine. That is a fundamental basic truth in economics. Over very long periods of time (multiple decades), growth in national wealth will equal growth in nominal GDP. And by national wealth, I am referring to our homes, stocks, bonds, real estate, etc.

Now, nominal GDP has been running about 5.5% for a long time. But between 1981 and 2006, US national wealth grew at an astounding 7.2%, from $10 trillion to $57 trillion. Mean reversion, or getting back to the average, means that national wealth must dip below 5.5% for an extended period of time. Woody thinks that from 2009 to the end of the next decade, we could see national wealth grow between 2.5-3%, well below our recent experience. National wealth is likely to fall this year and maybe next as housing values drop. This drop in wealth and slower growth means that consumers are not likely to return to their previous "shop till we drop" mode. And that is a serious pressure on earnings.
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_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Minyanville: Why Debt is Now Best Bet
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I have stated, and I still believe, that we’re in a secular bear market in equities that will not end until 16 year trailing returns for the Dow Jones Industrial Average and S&P 500 is in negative territory. In other words, this would mean that when we mark the high for S&P in March of 2000 at approximately 1500, a secular bear low assuming a -4% annualized trailing return for 16 years would place us at around 795 in 2016. Pretty sobering, right?

Looking at the graph below, courtesy of Ned Davis Research, we can see that secular lows have been established in the DJIA when the 16 year trailing return range is between -4% and 0%. Considering that the secular bull market party that went from 1982-2000 was the greatest on record, one must expect the secular bear to accompany it to be the nastiest on record as well.

[NDR's chart of Annualized 16 Year Trailing Returns for DJIA since 1916 can be found here.]
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_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.