John Hussman on the Cyclical Bull and Secular Bear Market (5/30/2011)

John Hussman's recent weekly market comment titled Small Windows in an Unfavorable Long-Term Picture analyzes structural and cyclical bull and bear markets. Earlier in the comment Hussman mentioned "it is clear that stocks are not in a secular bull market (in the 1950-1965, or 1982-2000 sense)" and showed historical Shiller Cyclically Adjusted P/E (price/earnings) ratios. The S&P has been in a strong cyclical bull market since the March 2009 low (666), up 105% at the recent high (1370) over 2.16 years or 26 months. In early May, Thomas Lee, Chief U.S. Equity Strategist at JP Morgan, said in a Bloomberg interview that we are in a structural bull market and increased his target on the S&P to 1,475. So what are we in, a secular bull or bear market? I think the S&P pierced the 2 year uptrend today; I will chart it out in my next post. Below are quotations from John Hussman's note. Read the previous paragraph on secular bull markets.

"The algebra of returns in secular bears, in contrast, is predictably hostile. As long as one allows for valuation levels to vary over the long-term, as they have historically, it is very difficult to escape very extended bouts of poor overall returns for stocks once valuations become as elevated as they are today. The canonical 18-year secular bear, again assuming long-term earnings growth is unaffected, produces overall annual capital gains of about (1.06)*(7/24)^(1/18)-1 = roughly zero. In general, dividend income (again, somewhere in the range of 4% over the full course of time) is the primary source of return for passive investors in a secular bear market period. Since the long contraction of valuations offsets the benefits of long-term earnings growth during secular bear periods, the cyclical bull markets tend to be shorter than average, and cyclical bear markets tend to be extended and often brutal.

Despite the "lost decade" since the extreme valuations of 2000, valuations are now presently at about the same level from which prior secular bear markets have just started. There is no basis to expect a secular bull until we observe the valuations from which they have invariably started. Meanwhile, the recent cyclical bull market from the 2009 low has already run the same duration and slightly further than the typical cyclical bull in a secular bear."


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