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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 22.8, down from the prior week's 23.4. (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 64.1 from last week's 66.5, continuing in Cyclical Bull territory. The US Bull-Bear Indicator has 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 has reclaimed the highs of 2011 whereas most other world indices are still well below those levels.
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Fig. 3 |
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IN THE INTERMEDIATE PICTURE
The intermediate (weeks to months) indicator (see Fig. 4) remained at 24 for the week. Three 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.
Fig. 4 |
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IN THE MARKETS
Markets declined worldwide this week, with International markets leading the way down. As has been the case all year, International markets exhibit much less strength than the US to the upside, and more weakness to the downside. Developed International markets were down more than -3%, while US market indices were only down from -0.5% to -1.5%. While International indices have not even bested their 2011 highs, US indices set new multi-year highs early in the week. This divergence is worrisome to many analysts, who point out that such divergences are frequently resolved to the downside.
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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Fig. 5 |
The average ranking of Defensive SHUT sectors rose smartly to 17.8 from 20.0, while the average ranking of Offensive DIME sectors declined to 16 from 15.8. The Defensive SHUT sectors continue to be ranked lower than the Offensive DIME sectors, though the margin is now at its lowest since early January.
Note: these are "ranks", not "scores", so smaller numbers are higher and larger numbers are lower. |
