Earlier Monday the anonymous author of Wall Street Rant sent me a link to a commentary that asks the intriguing question Is This Bull Market Fundamentally Driven?
The approach used in the commentary to answer the question is to do some simple math with the Cyclically Adjusted P/E (CAPE) popularized by Yale Professor Robert Shiller.
Here is the key concept and accompanying data:
In an email exchange with the author I pointed out that the current bull market came within a hair's breadth of a 20% decline at 19.39% in early October 2011, based on daily closes.
I received the following thoughtful response:
It's true that 10/2/11 only missed the 20% threshold by a hair (someone also made a post about it crossing if you count intraday) but that is also the case in many other bull markets. For instance, for the 1987-2000 bull market in 1998 the market went from 1186.75 to 957.28 or a fall of 19.34% (and using intraday highs and lows you can get beyond the 20% threshold as well...intraday 7/20/1998 to 10/8/1998). Or in 1990 the market fell from 368.95 to 295.46 or 19.9%.Then also for the 1974-1980 Bull market the market went from 107.46 on 12/31/76 to 86.9 on 3/6/1978 or down 19.1%. Haven't looked at all the others but I'm sure there are similar pullbacks....now that I look at these things maybe this is why the seemingly arbitrary 20% level is often used. Also, If 2011 was the start of a bull market then it's the second highest starting PE ratio for a bull market by a long shot (only 2002 matches it...and it is a big outlier).