Monday, January 21, 2013

Secular Bear Markets - don't wait for another big crash

I'm now waiting for a recession or bear market.   As an amateur doing this part time, the safest way is just to wait for a crisis, which seems to happen at least every ten years.   I dream the market drops 40%, like in 08, and I get to buy stocks on the cheap.  I'll probably be waiting a few years more. 

From "The Great Super Cycle" by David Skarica:
  • Since 1900, four secular bears lasting 15-20 years
  • Secular bull starts when valuations are compressed: In 1949, S&P's PE ratio was 9.1, In 1982 it was 6.6.
  • Majority of decline occurs in first half of secular market.  (We have probably passed this phase now).  In the first half of the secular bear market, you see the busts.  After the bust, then after the rallies, a long trading range followed.  In the second half of all these secular bear markets, volatility dried up. In the case of the 40s and late seventies, there was not one bear market greater than 35%.
          The last 4 bear markets show this behavior.

          Chart that averages out past secular bear markets
  • The long trading range is greeted with high inflation. (Inflation adjusted charts).
  • Therefore, if history follows suit, we will not see a crash in the current decade.  Rather, what will happen is that the market will trade sideways, with inflation picking up.
  • Secular markets do not end with a crash.  They end when the market has not done anything for a period of years and investors are no longer interested.  They end with a whimper, not a bang.
  • Average of 6 rallies in a secular bear market.  The current one has seen 3.
  • If the market peaks in 2010 or 2011 and sees another bear market, it will probably be minor in nature in nominal terms.  The 1909-11 bear market was 27.4%, the 1938-39 one was 26.2%, in the 1976-78 bear the market dropped 19.4% on the S&P and 26.4 % on the DJIA.   
Will this be similar to the 73/74 cyclical bull market? After a 6 year rally, the S&P only dropped 26% in the 81-82 recession.  But it was worse in real terms: There was an oil shock then and US inflation from 1978 to 1981 was over 10%.  I don't see any sign such high inflation can happen now.

If history repeats itself, I should NOT expect a repeat of 2008 bear market.  Expect a flattish market with smaller dips.  I should start buying on a smaller (25-30%) decline.  At that point, be prepared to go all in as it may take off from there.

2 comments:

Luca Morgen said...

Dear Sir,

Thanks for the advice. You are very sharp. You are right on the deck. I have already started my accumulation process, it should have another 10-14 years life left. So happy collecting ... Another way of looking for a valuation of one's worth is to look at the number of assets accumulated rather its equivalence in value. Value is delusional.

Lauryn said...


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