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Is a Secular Shift Coming?
04/30/2013 9:00 am EST
Stephen McKee of No-Load Mutual Fund Selections & Timing newsletter says if a secular bull market is in the works, we could see a double.
The stock market has been irregularly rallying since its lows in March 2009. Some indexes are now back to all-time highs on a nominal basis. So, what might this achievement mean in terms of the question about secular (five to 20 years) bull and bear cycles?
Is the 14-year secular bear from 2000 over, or not? There’s only one of two answers, but deciphering is always easier in hindsight.
First the negatives and then the positives. When we adjust the Dow Industrials to account for inflation, it still has another 1,500 points to go, or about 10%. There is no breakout rally currently underway. Looked at from this way; it’s just a head fake. As well, the typical under valuations historically seen at major bear market bottoms were not seen. The P/E ratio should have been in single digits, not at 14x. The Q ratio—the market price to replacement cost—should have been less than 50%, rather than above. P/E ratios should have dropped into single digits, rather than be at 14x. Dividend and earnings yields did not reach extreme levels.
But there are a few interesting positives. In the first place, over the last year, there have been at least three well known “names” in the financial industry that have thrown in the towel on stocks. This negative macro sentiment is contrary—so a positive. I would also point out the broad participation from the different fund styles in the current rally. In the top 5% funds, are value, mid cap, large cap, small cap, and growth/income. The only style not fully participating in the top 5%—although there’s a few in the top 20%—is the world style.
Lastly—at least back in 2009—some market measurements reached near extremes that were similar to other secular bear market levels. They’ve since quickly disappeared.
So, is the secular bear market over, and is the new secular bull market underway? If the answer is yes, it would imply—on average—future new highs of at least a double from current prices, extending over the next five to 15 years in the stock market.
If no, then another cyclical bear market is most likely much closer than many now expect.
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