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THE VERY BIG PICTURE
In the "decades" timeframe, we are in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller's Cyclically-Adjusted P/E) peaked at about 44. The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge. See Fig. 1 for the 100-year view.
Fig. 1
We are nowhere near the end of this Secular Bear Market, as the Shiller P/E is 20.53, down from the prior week's 21.2, and at the lowest level in six months. (see Fig. 2 - a snapshot of www.multpl.com). Even though P/E's are now half what they were at their crazy peak in 2000, they are nonetheless at the high end of the normal range and leave little if any room for expansion. This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that. (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).
Fig. 2
In fact, since 1881, the average annual returns for all twenty year periods that began with a P/E at this level have ranged from -2%/yr to +7%/yr with an average of just 3%/yr.
This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause P/E's to shoot upward from current levels (like what happened in the late 1920's and the late 1990's), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of the next Secular Bull Market.
Affirming this view, an August 2011 study from the San Francisco Fed titled "Boomer Retirement: Headwinds for U.S. Equity Markets?" reports on the likely effect of the coming tsunami of retiring boomers on the stock market. The study concludes that "The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining about 13% relative to 2010. The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027." |
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IN THE BIG PICTURE
The US Bull-Bear Indicator (see Fig. 3) decreased to 53.85 from last week's 56.4. Although it remains in Cyclical Bull Territory, the Bull-Bear Indicator is significantly off its highs and now is in the "pullback zone" between 45 and 55. Early in the year, the US Bull-Bear Indicator pushed further into Bull territory than other global asset classes, reflecting the higher strength of the US relative to the rest of the world. Alone among global equities, the US reclaimed the highs of 2011. Since then, several other major asset classes have fallen back into Cyclical Bear territory: Canada, International, and Resources & Materials.
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Fig. 3 |
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IN THE INTERMEDIATE PICTURE
The intermediate (weeks to months) indicator (see Fig. 4) fell to 6 from the prior week's 8. Seven weeks ago, it fell from the upper range of 30-36. When this indicator falls out of the upper range an intermediate decline is usually in the offing, with an expectation that the indicator will eventually fall further to the lower range of 10 or below. It has now arrived in the target area, where an upward reversal can occur.
Fig. 4 |
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IN THE MARKETS
A shockingly poor US jobs number on Friday and continuing European woes combined to deliver a significant 1-2 punch to the markets this week. The US jobs number, at just 69,000, was far lower than even the most pessimistic prediction. And in Europe, open speculation about the breakup of the Euro has begun as Greek polls indicate a lead by the anti-bailout parties and Spain had to save one of its biggest banks to the tune of $24 billion.
Declines in the US market ranged from -2.7% (Dow Industrials) to -4.1% (Mid Caps). Both the Dow and the Russell 2000 SmallCap indexes are now negative for the year. International markets declined similarly, and most major International Indices are now substantially under water year to date.
The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors ("S"=Staples [a.k.a. consumer non-cyclical], "H"=Healthcare, "U"=Utilities and "T"=Telecom) and the offensive DIME sectors ("D"=Discretionary [a.k.a. Consumer Cyclical], "I"=Industrial, "M"=Materials, "E"=Energy), is one way to gauge institutional investor sentiment in the market.
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The average ranking of Defensive SHUT sectors was unchanged for the week at 5.5, while the average ranking of Offensive DIME sectors rose slightly to 17.3 from 17.5. The Defensive SHUT sectors are now ranked substantially higher than the Offensive DIME sectors, reflecting the fear that has crept into the markets lately.
Note: these are "ranks", not "scores", so smaller numbers are higher and larger numbers are lower.
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SUMMARY
The US has led the recovery from last year's travails, and is currently the strongest among all global markets. However, the over-arching Secular Bear Market remains in place.
Because we are in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions such as have been experienced recently to be a frequent occurrence. Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens. |
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David Schlossberg, RFC®, AIF®
Larry Strzelecki, MBA, CFP®
1141 East Main Street, Suite 215
East Dundee, IL 60118
Securities and Investment Advisory Services offered
through fsic, member FINRA/SIPC.
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