The March 2009 until now run-up in the stock market has been unbelievable. Back in March of 2009, no one believed in the stock market anymore. The S&P 500 got as low as 667 and people were giving up right and left. Fast forward almost four years and the S&P 500 is now at 1510 (as of this writing), an increase of 126% in less than four years. During that time, we have only seen a couple of pull-backs and they were fairly minor. Now everyone believes that the stock market is going to hit new highs and we have even had some major institution investment heads say that we are now in a new secular bull market, similar to the one that occurred in 1982.
And that's where I start to roll my eyes.
I am going to make a very large statement that I have not seen said yet. I am not saying it to get a rise out of people. I am saying it because I keep going back to it every single time I look at stock market history and valuations. We are still in a secular bear market and…wait for it…this bear market will end up being the longest one in our history. This could very well not end until 2030 or later.
I usually dislike it when people make these kinds of predictions. They are usually done by pundits on TV who are trying to get attention and that's fine. I am clearly not on TV so I am not doing it for attention. I have my laid out info below to say why I believe this.
Also, I am not a perma-bear. I am not someone who thinks the stock market is always going down. I can show my investing history and show that in late 2008 and early 2009, I was scrambling to get more money into stocks and buy when the values were low. It was a great time to buy and I do, selfishly, hope we get to those levels again so I can buy at those levels. Remember, we should want to buy stocks when they are inexpensive. Everyone loves a sale. If you're retired or retiring shortly, I can understand why you would want the market to keep going higher, but maybe you shouldn't be in the market if your outlook is so short term? That isn't for me to decide. Everyone's risk tolerance is different.
10-Year P/E Ratio
One of the biggest valuation metrics that is talked about is the 10 year P/E ratio. What this does is it eliminates the year-to-year fluctuations in earnings that can happen and stabilizes over 10 years and sees how the stock market is valued from that perspective. Benjamin Graham was the originator of this and Shiller, at Yale University, talks about this frequently and in his book "Irrational Exuberance."
We have data going back to 1881 to show the 10 year P/E:
As you can see, there have been fluctuations as high as 43 in 2000 and as low as 5 in 1920. This means that back in 1920, you could buy into the stock market, as a whole, for merely 5 times the earnings of the previous ten years. How insanely cheap is that!?! And we all know how high stocks ran from there.
If you look at the charts and compare them to where the stock market went when the 10 Year P/E was below 10, it always preceded the start of a new secular bull market.
There have been four secular bears since data started back in 1871, including the one we are in now. They lasted from 1906-1921 (16 years), 1929-1949 (21 years), 1968-1982 (15 years), and 2000-present (13 years so far). So granted, there isn't a lot of data to talk about, but they were fairly lengthy and all had similar valuations when they ended.
The reason I think this bear market will be longer and worse is this: In the first three secular bears, the worst one occurred with a 10-year PE of 32.5, which was 25% lower than the 43 10-year P/E we experienced in 2000. Now, that in and of itself does not really mean that this one will be longer. As they say, the higher you go, the harder you fall. This isn't something to set in stone, but markets tend to go over the top, in terms of bubbles, and their corrections tend to be dramatically on the downside. Look at the past secular bear markets. While the historical 10-year P/E is 16, we have always gone into single digits, even going as low as 5 in one secular bear, before bull markets start again. So why would this be any different?
I am reading more and more articles now about how this is a raging bull market and even if we have a "slight" correction of 5-10% in the near term, we are headed for new highs. This is also a sign of topping of markets. In 2000, the books were written about Dow 20,000 and S&P 500 at 2,000 and it's not what happens. As Warren Buffett and Benjamin Graham always say, "Be fearful when everyone is greedy and be greedy when everyone is fearful." When someone announces that we will have new highs, that is a very greedy statement and I would recommend to be fearful.
We haven't learned our lessons of the past 13 years. Companies are still selling at nosebleed valuations. We will be nearing the end of our secular bear market and start of the new secular bull when great companies like GE are selling for mid to high single digit multiples for extensive periods of time. These are the big stocks that everyone will have ignored because they think stocks are dead.
We saw historical highs in 2000s and we still see people not learning those lessons even after two 50% crashes. To me, that shows that we have a ways to go. It has been 13 years and I'd love to be wrong, but unless we have some major corrections and economic hard times, which I don't think our government will let happen, we are going to be in this bear market for a long time.