The outstanding financier and analyst Barry Ritholtz just recently released a lasting stock exchange chart.
The chart shows what many students of market history swiftly discover: Stocks move in distinct ‘bull’ and ‘bear’ phases that frequently last for decades:
The huge argument among market experts these days is whether the market is still in the middle of the ‘bear’ stage that began in 2000 (14 years and counting) … or in the middle of a brand-new ‘bull’ phase that began at the financial-crisis low in 2009 (five years and counting).
The bulls look at the chart above and explain that we moved sideways for 10 years after 2000, say that was plenty, and forecast that stocks will now clearly create ever higher for many years as the new bull market continues:
Bears, on the other hand, take a look at the chart and see a temporary, Fed-fueled spike in the middle of a long bear market that they believe will see at least one more huge downtrend and correction (likely enduring years) prior to it is done:
So who’s more likely to be right?
Well, let’s include a bit more info to that chart.
Throughout history, stock costs have actually loosely gravitated around the ‘fundamentals’ of the underlying companies– specifically, revenues. Specifically, stocks have traded in a variety of 5X cyclically adjusted revenues (at bear-market lows) to 44X earnings (at the peak of the most significant bull market in history– the one that ended in 2000). The ‘typical’ P/E ratio over this period, meanwhile, has actually had to do with 15X.
When you add P/E ratios to the charts above, you quickly see a pattern:
Sustained bear-market durations have actually begun when the P/E is extremely high (-25 X+).
Sustained bull-market durations, meanwhile, have actually begun when the P/E is really low (5X to 9X).
In other words, sustained booming market begin when investors are so disgusted by stocks– therefore pessimistic about the future of stocks– that they’ll pay only 5X to 9X revenues for them. And sustained bearish market begin when financiers are so giddy with excitement about stocks and the prospects for stocks that they’ll happily pay 25X revenues or even more for them.
So how about the current period?
Well, it began as history suggested it would: With a stratospheric P/E ratio (44X) and extensive investor jubilation and enjoyment. Back in 2000, investors were wild about stocks and the prospects for stocks, and many people (including, unfortunately, me) believed that stocks would keep going up.
Then, after a crash (2000 to 2002) and one failed recuperation (2003 to 2007), stocks hit a crushing low in 2009 that was down even more than 50 % from the 2000 peak. At that minute, March 2009, lots of financiers were scared to death of having stocks, and lots of analysts expected the marketplace to drop much further. At that minute, the PE ratio also hit 13X. This was a below-average P/E, lastly, however it was likewise substantially higher than the P/E ratios that had marked previous bear-market bottoms.
Then, when the world didn’t end, for five years, stocks rocketed straight up, up until the marketplace had nearly tripled off the 2009 low, as financiers conquered their fear and gradually fell in love with stocks once more.
As recently as a month ago, with the market setting new highs, investors were once again extremely ecstatic about the future of stock prices. So thrilled, in truth, that they were willing to pay 26X profits for them.
So, what does this tell us?
Nothing definitive, unfortunately. No one knows the future.
But we can make a few observations:
- First, the P/E ratio at the current peak was higher than the P/E ratio at any time in the past 115 years, with the brief (and really short-term) exceptions of the two excellent market peaks of 1929 and 2000. For the ‘new bull market’ to continue indefinitely, for that reason, the market’s P/E would have to continue to keep rising toward the P/E at the historic 2000 market peak– which, it deserves keeping in mind, was followed by a devastating crash.
- Second, if we are undoubtedly in the middle of a new booming market, the bear-market ‘workout duration’ following the 2000 peak lasted just nine years. That’s considerably shorter than the three other huge workout periods in the 20th Century: The 19-year exercise from 1901 to 1920, the 19-year workout from 1929 to 1948, and the 18-year exercise from 1966 to 1982.
Unless something has actually altered that makes the past 115 years of market history unimportant (always possible, but probably not likely), it would not be unexpected if the most significant bull-market peak in market history was followed by one of the most significant bear-market workouts in history– one that, perhaps, may last as long or longer than any significant exercise duration to date.
As a long-term investor, I fortunately do not have to make short-term market calls, and I have ultimately found out (the tough and expensive method) to restrict my stock exposure enough so as not to be particularly troubled by volatility. I possess some stocks, so if we’re in the middle of a new booming market, terrific. I also have some cash and bonds, so if we’re still in the middle of a long bearish market, fine. If stocks tank from here, I’ll trade a few of that money for bonds and hope that the world does not end.
But my guess, for what it’s worth, is that we’re still in the middle of a long bear market. If you made me draw exactly what I believe is the most likely future for stock prices, for that reason, I would draw it like this: