February 6th, 2013

The Secular Bear Market and the QE’s

imageBarry Ritholtz recently asked in his blog, “Is the Secular Bear Market Coming to an End?“. He goes on to say “Here we are, a few weeks away from the start of the 14th year of the secular Bear market that began March 2000. The question on more than a few peoples’ minds has been whether or not it is reaching its end.”  Ritholtz goes on to give his definition of the term “secular bear market” and offers prerequisites required before the bear market can end.  In short, he concludes

“Regardless of your answer to our broad question, there is one thing that I believe to be clear: We are much closer to the end of this secular cycle than to the beginning. Many optimists — most notably, famed technician Ralph Acampora — believe the secular bear market has ended. Even skeptics have to agree that we are more likely in the 7th or 8th inning than earlier stages of the game.”

and offers the following chart:

Secular Bull and Bear MktsSource: Haver, Factset, Robert Shiller, FMRCo. Monthly Data, since 1871.

[Some of Ritholtz's comments and image match those of found in Fidelity Investments Viewpoints of a few days earlier.]

Helping to prevent losing objectivity to my fundamentally optimistic nature has been a long-running discussion about how the exit from the Secular Bear Market that has hampered the market’s advance for the past 14 years might ultimately look like.  The discussion began with a study of market behavior over the past 50-year that serve as the basis for the Market Momentum Meter, one of the principal topics of my book, “Run with the Herd“.

The data reveals that the market has fluctuated around a line that’s risen at a fairly consistent 7.5%/year rate since 1939.  The upper and lower boundaries of fluctuations around that line are +/- 44% on either side of that upwardly sloping mean distribution line.  The upper boundary was touched at the beginnings of the 1970 and 2000 decades, both of which were also the start of what turned out to be Secular Bear Markets.  The lows of both those Secular Bear Markets were at the lower boundary of the range.

S&P 500 1939-Present

Having touched the lower boundary in 2009, I wondered whether the exit from the 1970′s secular bear market might serve as an analog to the exit from today’s secular bear market.  “What the market trend be if it followed exactly the 1979-82 exit?”    I’ve written about the exit here several times over the years, the most recent being last year on June 4 in “Revisiting 1970′s Secular Bear Market Exit … Again” [that post includes links to previous references to the Secular Bear exit going back to October, 2008.

It turns out that the current Bear Market and the one in the 1970s is that inflation and economic stagnation (then known as “stagflation”) had one major difference.  Inflation had hit an annual rate of 13.5% when Jimmy Carter appointed Paul Volcker to head the Fed in August 1979.  He immediately began attacking inflation by raising interest rates to unprecedented levels of 20% by June 1981; inflation soon began easing and interest rates began to fall.

The current Bear Market was diametrically opposed, especially since the Financial Crisis and bursting of the housing bubble, with the fear of deflation with the crash in housing and real estate values.  To fight the “Great Recession” and ineffective or insufficient fiscal policies, Bernanke launched Quantitative Easing monetary policies which brought interest rates to low levels not seen since World War II.  The following chart shows the different impact of the two monetary policy courses:

1980's Analog and QE's

The 1970s Secular Bear Market exit analog may have been a good benchmark against which to measure the prospective current Bear Market exit.  At this late date, I would have to conclude that not only have low interest rates helped the economy avoid a depression, they may have also helped the stock market exit more quickly from the Secular Bear Market.  Rather than reversing and, thereby, extending the secular bear market’s life, so long as Bernanke keeps rates low, one can be confident that the market will soon exit the Secular Bear Market, cross into all-time new highs and, with luck, begin the first bull market advance since the 1990s.

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